Commercial (Non-Res) Construction outlook "bleak" for rest of 2010; uptick "expected" in 2011

I found this article on www.costar.com

Costar Group is the # 1 Commercial Real Estate Information Company (Yes, that's what they say on their website.)

AIA Forecast: Private Commercial Construction To Fall Nearly 30% in 2010
Overall Nonresidential Development On Track for Deeper Decline This Year; Modest Uptick Predicted for 2011
By Randyl Drummer
July 20, 2010

Spending on commercial and other nonresidential construction is likely to fall more than 20% this year -- significantly more than forecasters predicted six months ago -- with hotel and office construction down by more than 43% and 29%, respectively, according to the American Institute of Architects’ (AIA) midyear look at construction.

Even with a modest U.S. economic recovery under way, overall nonresidential spending is expected to drop 20.3% for 2010 -- and nearly 30% for private commercial development -- before edging up 3.1% in 2011, according to the AIA’s semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters. Manufacturing facilities will see a 20% spending decline. Even dollars allocated to new government and other institutional buildings, previously a pillar of strength for builders, will likely fall 12%.

Meanwhile, another bit of breaking news from the AIA this week, the monthly Architect Billings Index (ABI), seems to confirm that construction weakness will most likely continue deep into next year.

Most significant commercial structures are designed by architects or other design professionals, making it instructive to examine how busy those designers are right now making blueprints and drawings that will ultimately lead to grading or a ceremonial construction ground breaking, nine months to a year in the future. According to the latest ABI, the architects association’s monthly survey of client billings, recovery may not be imminent.

Although the ABI report of June released Wednesday showed a slight slowing in the rate of decline in new building design activity, the index remains at 46 -- well below the threshold of 50 denoting positive growth in architect invoices.

Historically, actual hard construction activity doesn’t begin to recover until 9 to 12 months after billings from design firms begin to grow again and projects move off the drawing board and into the development pipeline.

The AIA’s consensus forecast panel was downbeat at the beginning of the year, projecting a 13.4% decline in construction spending for nonresidential projects. But at midyear, their outlook is still bleaker.

"Our construction forecast panel expects the weakness in the construction sector to continue well into 2011," said AIA Chief Economist Kermit Baker.

Most nonresidential construction building categories are weighed down by some degree of oversupply, combined with weak demand, declines in commercial property values, difficulty getting project financing and macroeconomic uncertainty. Those factors have contributed to "one of the steepest construction downturns in generations," Baker said.

"We have businesses nervous about expanding their facilities, a fragile financial sector, excess commercial space, and general unease in the international economy," Baker said.

Despite the glum assessment, there are still tendrils of optimism among economists and construction executives that conditions will get better next year.

Despite the projected decline of nearly 30% in commercial construction for 2010, architect billings for commercial projects was the only sector of the ABI to record positive gains in June. That points to a slight recovery next year, which correlates with the Baker's projection of 3.1% growth in total nonresidential construction in 2011.

Public and institutional construction, which held its own during the recession, is now feeling the bite of canceled municipal projects, diminishing stimulus money and budget shortfalls. Frank Martinez, executive vice president for Laguna Beach, CA-based Griffin Structures, said the competition for the small pool of contracts is fierce.

[Joel's comment: the above comment by Frank Martinez is 'good news' for reprographers, for the fiercer the competition in project bidding, the more sets of plans and specs that will be ordered.]

Martinez said a typical contract put out by one Los Angeles-area school district, which typically would have drawn eight or 10 bidders a couple years ago, now easily draws 50 to 100. Much of that new competition is from single-family home builders displaced by the downturn and seeking to infill their businesses with commercial and public work, he said.

That said, longtime pessimism among builders is slowly giving way to guarded optimism, according to Martinez.

"We're actually starting to see more RFPs [requests for proposals] coming out," said the executive for Griffin, which has done $1.5 billion in construction projects, the bulk of them buildings for county and municipal agencies.

Government deficits and spending cuts to make up budget shortfalls have had a major impact on public sector construction, Martinez said.

"With the state of California taking $2 billion from municipalities and poised to take more to staunch its red ink, it's forcing cities to be more creative with less, including fewer staff. In turn, we have to be more creative."

That often means developing projects in stages and helping clients find alternative financing solutions, Martinez said. Lower staffing levels mean agencies may not be equipped to hit the ground running as fast when economic growth picks up speed, he said.

The U.S. economy is improving, but demand for space and ultimately new commercial construction typically lags recovery in job markets and the broader economy by several quarters.

Although commercial property values have fallen more than 40% from their mid-2007 highs through the first quarter of this year, the declines have slowed significantly since the middle of last year. The risk of commercial mortgage and construction loan defaults remains a serious concern until values recover, however.

Tight lending standards continue to create problems for new nonresidential projects, the AIA's Baker noted. The Federal Reserve Board’s Senior Loan Officer Survey on Bank Lending Practices still points to restrictive lending conditions for commercial real estate loans. The April 2010 survey indicated that most banks kept their lending standards unchanged in the first quarter, and a few even tightened terms on business loans.