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Nonresidential: Commercial Environment Improves; Institutional Environment Worsens

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Commercial construction starts and spending are still slipping but most of the decline is now over so there are spot upward spikes occurring. But none are yet sustainable at the national level. Market drivers are now balanced between positive and negative. Credit conditions are improving marginally. Credit rates are very low and FRB statements assure that they will stay low well until late 2011, says Reed Construction Data chief economist Jim Haughey.

Commercial construction starts and spending are still slipping but most of the decline is now over so there are spot upward spikes occurring. But none are yet sustainable at the national level. Market drivers are now balanced between positive and negative. Credit conditions are improving marginally. Credit rates are very low and FRB statements assure that they will stay low well until late 2011. The economy is awash in liquidity so large lenders are beginning to loosen for equity participation which makes loans for large projects more available. Funds continue to flow into real estate investment trusts. However, most small projects are typically funded by loans from regional and local banks which have not loosened their lending standards and not likely to do so for many months. Hundreds of smaller banks have too many defaulted mortgages for commercial property and are struggling to reduce their exposure to real estate.

The occupancy and rental rate short term market drivers that real estate investors look at to estimate investment profitability are still mildly negative on a year ago comparison basis but are now stabilizing. As a result, starts of developer financed projects are slowly rising, refilling the pipeline of construction work for the year ahead. This is matched by recent reports that design activity has almost stabilized nationally with gains reported in some regions.

By contrast, market drivers for institutional projects are weakening after remaining strong through the recession and the initial stage of the economic recovery. Emergency federal funds are ebbing and state and local government funding from their own sources has turned down sharply. Both of these trends will worsen for several quarters.

Many large states have been forced to make huge budget cuts for new fiscal year beginning 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.

Key Indicators of the U.S. Market Environment — Augsut 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)
130 155 W/E
aug 20th 10
159 Average Rising
10-Year T-bill rate, % level (FRB) 3.67 3.05 W/E
Aug 13th 10
2.76 Low Falling
Office rent, 54 metro areas,
% change y/y (PPR)
-7.3 -6.4 Q2 -5.0 Low Falling
Office vacancy rate, 54 metro areas,
% level (PPR)
18.5 19.6 Q2 19.6 High Steady
Office employment, % change y/y (P&PR) -5.0 -3.5 Jul -1.5 Low Falling
Office construction starts (% change),
3-mon. ave. y/y % change (RCD)
-59 2 Jun 4 Low Steady

Hotel room rate, 54 metro areas, ann.
% change (PPR)
-12.5 -6.7 Q2 -3.4 Low Falling
Hotel occupancy rate, 54 metro areas,
% level (PPR)
59.8 58.7 Q2 59.8 Low Steady
Airline revenue passenger miles,
% change y/y (RCD)
-4.1 17.7 July 5.0 High Rising
Real price of gasoline , $s/gal.
(U.S. Energy Dept.) May/'10 = 100
2.56 2.73 Aug 2.81 High Steady
Hotel construction starts (% change),
3-mon. ave. y/y (RCD)
-50 -2 Jul 6 Low Steady

Retail rent, 54 metro areas,
% change y/y (PPR)
-5.2 -8.2 Q2 -5.4 Low Falling
Retail vacancy rate, 54 metro areas,
% level (PPR)
17.5 19.4 Q2 19.2 Low Rising
Retail sales, % change y/y
(U.S. Census Bureau)
-8.4 5.2 Jul 5.5 Average Rising
Consumer confidence index
(The Conference Board)
47.4 54.3 Jul 50.4 Low Falling
Consumer real income, % change y/y
(U.S. Commerce Dept.)
5.9 3.2 Jun 4.4 Low Rising
Retail construction starts % change),
3-mon. ave. y/y (RCD)
-53 51 Jul 66 Average Rising
Industrial
Warehouse rent, 54 metro areas,
% change y/y (PPR)
-7.3 -8.7 Q2 -7.0 Low Falling
Warehouse vacancy rate, 54 metro areas,
% level (PPR)
12.2 13.3 Q2 13.2 High Falling
Business inventory, % change y/y
(U.S. Census Bureau)
-11.3 -1.5 Jun 0.2 Average Rising
Business sales, % change y/y
(U.S. Census Bureau)
-18.6 11.5 Jun 9.2 Low Rising
Warehouse construction starts (% change),
3-mon. ave. y/y (RCD)
3 4 Jul 5 Low Steady
Capacity utilization rate, % level (FRB) 66.5 71.6 Jul 72.4 Low Rising
Manufacturing production index (FRB) 84.5 90.4 Jul 91.4 Average Rising
Goods Exports $ billions
(U.S. Commerce Dept.)
86.6 107.3 Jun 105 Average Falling

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 — August 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.)
356 330 Q2 340 Low Falling
State & local government tax receipts,
$ billions (U.S. Commerce Dept.)
1232 1319 Q2 1321 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

by Jim Haughey

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