Nearly half of the commercial market drivers are now positive or neutral. However, commercial construction spending is still slipping slowly although starts may have stabilized. Retail, office and hotel starts all increased substantially in June. These developer financed projects that are built for lease entered the recession early and will begin to recover first. Other commercial sectors, such as stadiums and laboratories, recorded June declines in starts. The recession reached these sectors later so a later recovery is expected. Their late position in the business cycle is due to their specialized use and often a public role in their financing.

Most of the decline is now over in the commercial sector so there are spot upward spikes occurring. But none are yet sustainable at the national level. The improving items are the long lead drivers for credit conditions, consumer spending, office employment and industrial activity. The market drivers that are weak and still weakening are for rental and occupancy rates and construction starts. Real estate investors focus on this latter group so they still see low and still declining profit opportunities for new construction. But they also now see a market turnaround in their planning horizon with rents, occupancy and hence profits on the upswing by the time buildings started now are completed. This is consistent with recent reports that design activity has almost stabilized with gains reported in some regions.

The decline is easing for the commercial market drivers that are still negative. The turnabout to recovery is underway although their may be a summer pause as in the rest of the economy. The initial recovery will not be fully in place until yearend. By contrast, the market drivers for institutional construction are all weakening or neutral. Investment returns, which provide a significant share of construction funding, suffered a turnabout to decline in the last month although mid-July stock index changes suggest that this decline may be brief.

Normally at this stage of the business cycle, institutional construction would be weaker and would have a much weaker outlook. Federal stimulus plan funds for buildings, twice as much as provided for road work, are dampening the institutional construction recession. After a fifteen month political delay there has been a recent flurry of announcement of building stimulus plan money assigned to specific projects or allocated to specific states.

The economic environment for institutional construction is now weakening after holding up through the recession. Cash strapped state and local governments are being forced to cut spending and are generally choosing to save jobs and postpone building maintenance or expansion. Many large states are being forced to make huge budget cuts for new fiscal year which began July 1st. This includes California, New York, New Jersey and Illinois. California has a $19 billion budget deficit that will be met with a 15% cut in spending. The state spending cuts will, in turn, force local governments, schools and public universities to trim construction spending to deal with reduced state aid. Bond funded public construction is also weakening. Although the issuance of federally subsidized “Build America” bonds is increasing, this appears to be a back door way to fund operating deficits rather than start new facility projects. Additional federal appropriations to aid state budgets have not been approved by Congress although a small amount, less than President Obama requested, may yet be approved.

Key Indicators of the U.S. Market Environment — July 2010 Commercial and Industrial Construction (Driven by cyclical factors)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
Commercial
Dow Jones composite REIT, index (Dow Jones)	111	163	W/E Jul 21th 10	153	Average	Rising
10-Year T-bill rate, % level (FRB)	3.55	3.26	W/E Jul 16th 10	3.05	Low	Falling
Office rent, 54 metro areas, % change y/y (PPR)	-5.1	-8.3	Q1	-7.1	Low	Falling
Office vacancy rate, 54 metro areas, % level (PPR)	17.6	19.4	Q1	19.6	High	Rising
Office employment, % change y/y (P&PR)	-3.4	-5.1	Q1	-3.2	Low	Rising
Office construction starts ($s), 3-mon. ave. y/y % change (RCD)	-66	-32	Jun	4	Low	Steady
Hotel room rate, 54 metro areas, ann. % change (PPR)	-16.5	-11.7	Q1	-8.5	Low	Falling
Hotel occupancy rate, 54 metro areas, % level (PPR)	59.5	59.0	Q1	58.5	Low	Falling
Airline revenue passenger miles, % change y/y (RCD)	-15.2	16.6	Jun	17.7	High	Rising
Real price of gasoline , $s/gal. (U.S. Energy Dept.) May'10 = 100	2.56	2.73	July	2.79	High	Steady
Hotel construction starts ($s), 3-mon. ave. y/y (RCD)	-58	-20	Jun	0	Low	Steady
Retail rent, 54 metro areas, % change y/y (PPR)	-5.2	-8.2	Q1	-7.0	Low	Falling
Retail vacancy rate, 54 metro areas, % level (PPR)	16.2	19.2	Q1	19.4	Low	Rising
Retail sales, % change y/y (U.S. Census Bureau)	-10.5	6.9	Jun	4.7	Low	Rising
Consumer confidence index (The Conference Board)	49.3	62.7	Jun	52.1	Low	Falling
Consumer real income, % change y/y (U.S. Commerce Dept.)	4.0	3.6	May	4.6	Low	Rising
Retail construction starts ($s), 3-mon. ave. y/y (RCD)	-58	-12	Jun	52	Low	Steady
Industrial
Warehouse rent, 54 metro areas, % change y/y (PPR)	-2.2	-9.2	Q1	-8.4	Low	Falling
Warehouse vacancy rate, 54 metro areas, % level (PPR)	11.3	12.1	Q1	13.3	High	Rising
Business inventory, % change y/y (U.S. Census Bureau)	-9.6	-2.9	May	-1.5	Average	Falling
Business sales, % change y/y (U.S. Census Bureau)	-18.2	13.1	May	11.8	Low	Rising
Warehouse construction starts ($s), 3-mon. ave. y/y (RCD)	0	-12	Jun	5	Low	Steady
Capacity utilization rate, % level (FRB)	65.2	71.8	Jun	71.6	Low	Rising
Manufacturing production index (FRB)	83.0	90.6	Jun	90.4	Low	Steady
Goods Exports $ billions (U.S. Commerce Dept.)	84.8	104.2	May	107.2	Low	Rising
Abbreviations: y/y = year over year; W/E = week ending; FRB = Federal Reserve Board; PPR = Property & Portfolio Research; RCD = Reed Construction Data Table: Reed Construction Data and Reed Construction Data - CanaData

Key Indicators of the U.S. Market Environment — July 2010 Institutional Construction (Driven by demographics and government finances, as well as cyclical factors)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
Institutional
State & local govt. capital spending, $ billions (U.S. Commerce Dept.)	348	351	Q1	337	Low	Falling
State & local government tax receipts, $ billions (U.S. Commerce Dept.)	1272	1279	Q1	1296	Low	Steady
State budget reserves, % of Exp. (National Governors assn.)	4.7	n/a	FY 10	6.2	Low	Steady
Abbreviations: y/y = year over year; W/E = week ending; FRB = Federal Reserve Board; RCD = Reed Construction Data Table: Reed Construction Data and Reed Construction Data - CanaData