Nonresidential commercial construction environment turns positive

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Reed Construction Data’s Chief Economist Jim Haughey reports commercial (built to lease) market drivers turned almost universally positive during the spring. The only negative drivers are office and retail rents measured on a year over year basis. Both of these rental indexes have shown quarter to quarter rises recently so they are imposing little restraint on commercial project starts.

However, very weak economic growth gains early in 2011 may stall or even briefly reverse the improvement in the starts environment for commercial properties unless economic growth is clearly stronger in the second half of the year.

The build vs. buy indicator still points at buy for real estate investors in many but not all markets. Asset prices of existing building have risen significantly from the cyclical low level and continue to improve. This metric is progressively moving to the build side as the value of existing buildings rises and improving occupancy and rental rates boost net operating income prospects. However, this is a long process with the indicator tilting to build market by market. The process will take 2-3 years in the weakest markets but has already happened in a few markets.

The market drivers for institutional construction are rapidly deteriorating. Federal stimulus funding is largely spent of committed. Congress had refocused on spending cuts which will inevitably include federal buildings and grants to lower levels of government and nonprofit institutions. Rising tax revenues will eventually offset this constraint at the state level in 2013 but funding constraints will remain at the federal and local level and with nonprofit institutions longer. Largely self funded institutions, such as hospitals and private education, will fell relatively constraints from government spending cuts.
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