Recession deepens for nonresidential construction

August 11, 2010

Sluggish growth and marginal declines in nonresidential and multifamily construction spending late last year in turned into a recession early this year, which will persist through the end of 2009.

Construction spending increased 10.2% in 2008, but should decline 3% this year before rising 2% in 2010. Because the period of decline is almost entirely within a single year—2009—the annual average percentages understate its severity from the beginning of the year to the end.

Construction spending will decline 6% from the 4th quarter of 2008 to the 4th quarter of 2009. The decline will be 17% for religious buildings; 12% for manufacturing and public safety; 9% for multifamily projects; 6% for amusement and recreation; 5% for retail; 4% for education, healthcare, and offices; and 1% for hotels.
    
        

        
      




Construction starts will drop more than spending. BD+C reports that construction starts for nonresidential buildings and multifamily dropped 12% from the summer to the fall quarter, while job site construction spending reported by the U.S. Census Bureau was unchanged. Pre-start planning will drop more than starts; many scheduled starts will be delayed and more projects already underway will be halted or slowed.

Lack of credit remains a constraint on construction starts. This restraint is in the form of higher than normal lending rates for less than prime borrowers compared with the rate charged to prime borrowers, and an overall lack of available credit to a small but larger than normal share of loan applicants. This constraint is significant compared to the easy credit period of 2004-06, but is not significantly more constraining that what occurs in every recession.

Banks have a trillion dollars in surplus funds they aren’t lending, some of which they’re keeping in order to cover hundreds of billions of dollars in yet-to-be-recognized losses on existing loans. However, banks also don’t like the construction loan applications they are receiving and are reluctant to lend to organizations, including: state and local governments with still-shrinking budget reserves and tax receipts; institutions with depressed investment fund values and still weakening revenues; and commercial developers faced with slipping rents and declining occupancy rates.
    
     

         
 

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