Commercial construction spending improving; institutional spending worsening


Nearly half of the commercial market drivers are now positive or neutral,Reed Construction Data economist Jim Haughey reported last week. However, he adds, 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.

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.

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.

The Carolina Journal reported that about $909 million in Build America bonds have been issued for such projects in North Carolina as building schools, creating a toll road in the Triangle, and upgrading a nuclear power plant. Thirty-five percent of the interest costs are subsidized by the federal government, making it cheaper to issue long-term debt with Build America bonds than with traditional tax-exempt municipal bonds.

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