Most of the decline in construction spending in this building cycle has already occurred for commercial buildings. A 4-5% further decline is expected from August through next winter. The decline is expected to be less for retail and more for hotels. An expected resumed rise in project cost at yearend, mostly for materials, will halt the decline in non-residential construction spending in current dollars in about six months but the decline will extend into the summer measured inflation adjusted dollars. There will not be a significant increase in construction activity until late next year.

The recession began early in the retail market. Peak spending in this cycle was August 2007. The 40% drop since then has been across all retail sectors but especially deep for retailers with very income elastic products. This includes restaurants, auto dealers and the retailers whom typically locate in the larger shopping malls. By contrast, retail construction spending has held up much better for retailers with relatively income inelastic products. This includes big box discounters and the retailers who typically locate in the smaller neighborhood shopping centers.

Ahead, retail construction spending is expected to increase only 5% in the next year. This includes little if any growth in space construction or reconstruction for high end retailers. Their sales do not rebound until economy recovery is at least a year old. These retailers build by far more expensive space than discount and convenience retailers so their lack of increasing space demand will dominate retail construction through 2010.

Hotel construction spending tripled from 2004 to 2008 and then dropped 37% from June 2008 to August 2009. This boom-bust was driven by building trends for destinations hotels with casinos or near major attractions or resort areas. These hotels are much more expensive per square foot. Much of this happened in Las Vegas but it also occurred in California, Florida and casino projects in many states.

A 10% further drop in hotel construction spending is expected over the next nine months. This is the net of even larger declines for destination hotels and smaller declines for traditional hotels at airports, downtown and by interstate exits. By next summer, spending is expected to be stable or slightly rising for properties designed for business and budget consumer travelers.

There is a risk that spending for destination hotels could collapse more than forecast. Several billion dollar Las Vegas projects are limping through to completion but announced cancellation suggest few Las Vegas starts in the next few years. Room occupancy has dipped below 50% and gambling receipts are off about one-third. But some of the buildings previously expected in Las Vegas will be replaced by new Casino hotels around the country. Many state governments are looking to gambling revenues to bolster their depleted budget reserves and provide new jobs.

Office construction spending peaked in September 2008 and has since fallen 23% with a further 5% drop expected by next winter. The relatively small decline in this market has two causes. First, billions of dollars of stimulus plan money for federal offices will begin to be spent late this year. Second, the office market is relatively late in the business cycle so it was not as over-extended as other commercial sectors last September.

Key Indicators of the U.S. Market Environment — Oct 2009 Commercial and Industrial Construction (Driven mainly by cyclical factors)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
Commercial
Dow Jones composite REIT, index (Dow Jones)	129	123	Oct 5 09	133	Low	Rising
10-Year T-bill rate, % level (FRB)	3.7	3.37	Oct 2 09	3.28	Low	Falling
Office rent, 54 metro areas, % change y/y (PPR)	3.1	-4.4	Q2	-7.1	Low	Falling
Office vacancy rate, 54 metro areas, % level (PPR)	15.7	17.5	Q2	18.4	High	Rising
Office employment, % change y/y (P&PR)	0.6	-3.3	Q2	-4.9	Low	Falling
Office construction starts ($s), 3-mon. ave y/y % change (RCD)	1.1	-56.5	Aug	-54.8	Low	Falling
Hotel room rate, 54 metro areas, % change y/y (PPR)	-6	-9	Q2	-13	High	Falling
Hotel occupancy rate, 54 metro areas, % level (PPR)	66	63.0	Q2	61	Average	Falling
Airline revenue passenger miles, % change y/y (RCD)	-1.6	-4.1	Aug	-3.7	Low	Falling
Real price of gasoline , $s/gal. (U.S. Energy Dept.)	366.1	263.2	Sep	262.4	High	Steady
Hotel construction starts ($s), 3-mon. ave. y/y (RCD)	0.9	-45.9	Aug	-47.6	Low	Falling
Retail rent, 54 metro areas, % change y/y (PPR)	-2.5	-13.0	Q2	-6.7	Low	Falling
Retail vacancy rate, 54 metro areas, % level (PPR)	12.4	16.2	Q2	17.6	Low	Rising
Retail sales, % change y/y (U.S. Census Bureau)	2.9	-8.5	Aug	-5.4	Low	Falling
Consumer confidence index (The Conference Board)	61.4	54.5	Sep	53.1	Low	Rising
Consumer real income growth, % change y/y (U.S. Commerce Dept.)	-2.4	3.9	Aug	-1.7	High	Falling
Retail construction starts ($s), 3-mon. ave. y/y (RCD)	-29.2	-51.3	Aug	-56.2	Low	Falling
Industrial
Warehouse rent, 54 metro areas, % change y/y (PPR)	-2.5	-6.7	Q2	-6.7	Low	Falling
Warehouse vacancy rate, 54 metro areas, % level (PPR)	9.6	11.3	Q2	12.2	High	Rising
Business inventory, % change y/y (U.S. Census Bureau)	6.8	-11.1	July	-11.8	Low	Falling
Business sales, % change y/y (U.S. Census Bureau)	7.9	-18.0	July	-17.8	Low	Falling
Warehouse construction starts ($s), 3-mon. ave. y/y (RCD)	18.7	-9.7	Aug	-49.6	Low	Falling
Capacity utilization rate, % level (FRB)	75.3	66.2	Aug	66.7	Low	Rising
Manufacturing production index (FRB)	111.0	97.0	Aug	97.6	Low	Rising
Goods Exports $ billions (U.S. Commerce Dept.)	117.2	84.1	July	86.7	Low	Rising
Abbreviations: y/y = year over year; WE = week ending; FRB = Federal Reserve Board; PPR = Property & Portfolio Research; RCD = Reed Construction Data. Table: Reed Construction Data