Retail leads nonresidential building recovery

Commercial construction spending accounted for 31% of the total year-to-date gain in nonresidential and multifamily construction through August. The quick rebound in spending on new and renovated multifamily housing, retail, service, and parking facilities early in the construction expansion cycle is typical of the cyclical pattern.

Retailers and storefront service firms respond quickly to changes in the scale and mix of consumer spending. However, they build very inexpensive space compared to space built for other businesses. General merchandise retail, especially the big box discount stores, accounted for more than 25% of the increase in commercial construction spending year-to-date through August. These are typically the least expensive buildings per square foot.

Stand-alone stores and shopping centers accounted for 33% of the December to August increase in construction. Note that construction activity has not yet picked up for the larger shopping malls. Two of the hottest retail sectors, drug stores and building materials, together account for 17% of the added construction.

The flip side of a fast start is a slow finish. Commercial construction is forecast to account for only about 15% of the increase in nonresidential construction spending in the final quarter of 2004 and throughout 2005.

But most of the expensive square footage has yet to be built in this construction expansion cycle. So far only hotel construction has picked up significantly this year, but double-digit increases in construction spending are expected by the end of next year in office, healthcare, education facilities, and manufacturing plants.

The sluggish sectors are food stores, auto service, restaurants and bars, parking, and commercial warehouse. Expect spending for restaurants and warehouses to improve strongly next year at the mature end of the business cycle. But no significant improvement is expected for the other sluggish sectors.