Manufacturing construction stabilizes, seen expanding in '04

Manufacturing construction spending fell nearly 60% in the last two years but is expected to be stable to slightly higher for most of this year, although the total still falls 10.4% from 2002. Sustained growth will begin this fall, when factory production schedules move 2-3% higher and as economic recovery seems more certain. Spending for new or remodeled manufacturing facilities will soar to a 30% annual growth pace within a year. Total spending will rise 20.8% in 2004, but the vacancy rate will remain above average and inflation-adjusted rental rates below average into 2005.

This is still a troubled market. For manufacturing, the 2001 recession was more severe than the last recession in the early 1990s, and the recovery just now beginning will be slower than that of the early 1990s. The electronics industry, now a larger share of manufacturing, overexpanded in the late 1990s and is still struggling with substantial excess capacity even as it is again the fastest-growing manufacturing industry.

Nonetheless, much of forecast surge in manufacturing facility spending is for electronics. Process technology is improving so fast that older facilities will be abandonded, even though they have surplus capacity, in favor of new, facilities.

The capacity utilization rate in the newest semiconductor plants is near 90%, with many previously delayed building projects soon to be restarted. But spending in other industries will not grow until well into 2004.