Commercial comes in from cold

May 01, 2004 |

Private commercial construction spending fell 6.0% from the initial recovery surge it experienced last summer to the opening months of 2004. However the mix of changes by sector suggests that the decline will soon be reversed.

Grocery stores, drug stores, and parking accounted for 80% of the decline. Construction spending also declined for auto dealerships, building supply stores and mini-storage facilities. The fastest-growing sectors were restaurants and bars (+24.7%), general merchandise stores (+12.7%), and auto parts and service stores (+9.0%). Shopping centers, malls and warehouses also had 2-3% spending increases.

The abrupt drop in grocery store construction was largely due to the strike by 70,000 California grocery clerks, which has been settled, as well as the temporary squeeze on grocery margins by surging farm prices, which is likely to end in the next few months. Nonetheless, this will be at best a slow growth market in 2004-05 because the continuing market share loss to big box, nonunion discount stores. Drug stores are also losing sales to big discount stores, but the recent plunge in store building was partly random in this small market and partly related to a pickup in mergers, which is resulting in store closures in over-served neighborhoods.

The sharp decline in construction spending for parking facilities is a mystery, but likely random in nature.

Home Depot and Loews both have aggressive expansion plans so the small drop in their building may be the result of site approval and permitting problems. Big-box building supply is still the fastest growing retail sector. Auto dealership spending spikes and falls periodically when car sales surge, new brands are introduced, or profitable manufacturers provide subsidies. None of this is occurring now so there is a lull in activity after all of these spending drivers appeared briefly in 2002.

Commercial spending

Billions of dollars, seasonally

adjusted annual rate

Quarter Year $
1 2003 59.6
2 2003 60.2
3 2003 63.0
4 2003 60.8
1(f) 2004 59.0
2(f) 2004 61.1
3(f) 2004 63.2
4(f) 2004 65.7
1(f) 2005 67.7
2(f) 2005 69.4
3(f) 2005 71.4
4(f) 2005 73.6
Source: Census Bureau
Forecast (f): Reed Research Group

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