Retail, parking are the bright spots in the stagnant commercial sector

Commercial construction spending expanded about 15% from winter 2004 to spring 2005, recovering to its pre-recession level. But growth is forecast to slow to about a 6% pace through the end of 2007.

Real estate investors currently see the overall commercial sector as stable, but with little prospect for the high returns expected in the hotel and office markets. Relatively few new commercial projects are in the pre-construction phase, according to Reed Construction Data.

The commercial market is the sum of two rapidly growing sectors—multi-unit retail buildings and parking—and several stagnant or declining sectors, including warehouses, auto dealerships, parts and service stores, standalone retail, and restaurants. Multi-unit retail and parking construction spending has increased by 35% since early 2004, accounting for all of the growth in the commercial sector. The new space accommodated mostly new residential neighborhoods. While spending on multi-unit retail buildings is expected to slow in the coming months, it will still account for almost all of the commercial growth in the next two years.

Spending for warehouses, auto dealers, auto service and parts stores, and standalone stores fell 7% (after inflation) since early 2004. Only a small improvement in construction activity is expected in these markets through 2007.

The market for restaurant and food stores has plunged more than 25% during the last few months and has averaged zero growth in construction spending since early 2004. While the dip is temporary, neither market will record significant growth through 2007.