Slow rebound expected in commercial space

Commercial spending rose 2.5% last summer and early fall, until pre-Iraq war investment caution led to a six-month decline totaling 5%. Spending is expected to grow at a 4% annual pace late in 2003 and accelerate to 8-9% by the end of next year, for an overall increase of 6% for 2004. The peak spending pace of 2001 will not be regained until well into 2005. Higher commercial space needs and improved retailer profits will drive the turnaround.

Cheap credit will contribute indirectly. It will keep housing starts at the recent high level and force retailing to expand into areas with added housing. The commercial vacancy rate is currently at the high end of the historical average range. But this does not constitute a major spending restraint.

Very little vacant space is in move-in condition, so renovations will be needed. While there is enough existing space to absorb several years of consumer spending growth, much of it is in the wrong location. Added space will be needed in the rapidly expanding metro areas in the South and West.

The Census Bureau has redefined "commercial" to include retailing (65%), warehouses (20%), restaurants and bars (15%) and automotive (including parking) (5%).

Warehouse spending has been almost unchanged for a year with year to date spending 13.5% below last year. There is no evidence yet of the beginning of the expected 2003-04 rebound in this sector. The current spending level is 28% less than the exaggerated peak in mid-2000 when dot-coms were building warehouses with venture capital funds that were never needed. Current spending is only slightly above the depreciation replacement level. The recovery will stop well short of 2000's peak level.

However, the larger multiretail (shopping center, shopping mall) sector has been expanding rapidly for several months and has regained two-thirds of the 20% decline in construction spending from peak level in January 2002.

The rebound is 78% from the recession low value in the smaller strip malls that follow close behind new housing developments but only 25% for the larger regional shopping centers that do not have an adjacent new housing development to sustain them.