Tuesday, February 23, 2010

Can you tell if this is good news or bad news or no news about Construction activity in the U.S.?

From Reed Construction Data
January’s Construction Starts Rise Led by Commercial Projects
February 22, 2010 - Jim Haughey

The value of construction starts increased 4% in January after a weak December in spite of continuing unseasonably poor construction weather. Starts were 25% higher than in the previous January. Job-site construction spending fell 10% since last January. Interpret the divergence this way. The sharp decline in starts in early 2009 cut starts below completions leading to the year-long fall in construction spending. Starts plunged nearly 50% from August 2008 to June 2009. Since then, starts have rebounded nearly 50% so the pipeline of work is again expanding and will lead to resumed increases in monthly construction spending in a few months, with progressively larger gains through 2011.

Residential, heavy and institutional building starts were all about the same in January as in December. The major change was a 47% jump in commercial building starts, which reversed a similar drop in the previous month. Hence, this is not a signal that the commercial starts trend has abruptly improved. Still, there is a hint that improvement is coming soon.

The credit access problems that have plagued developers for a year-and-a-half are changing. Since late 2008, loan denials have come with one or more of three reasons. Lender has no money to lend. Lender is reducing real estate loan exposure. Or lender does not think developer can earn enough on the completed building to repay the loan.

Compared to a year ago, the no-money-to-lend problem has lessened and will lessen more, but remains a serious restraint on construction. The withdrawal-from-real-estate lending problem has worsened and will worsen a little more into the spring. Bank examiners are forcing lenders to be more cautious in real estate lending. But emergency loans from the Federal Reserve Board will keep this problem from getting significantly worse.

Loan denials due to unacceptable cash flow projections are becoming less frequent with significant improvement ahead. A year ago, a speculative building would have been completed in a depressed market that was expected to get worse, sharply dropping asset values. Today, the same speculative building will be completed in a market that will be slightly more depressed but is on the upswing, with asset values expected to rise for three or more years.

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