Commercial project starts plunge

December 01, 2008 |

The credit freeze recession dropped the value of private commercial construction starts 44% from September to October, but public and institutional construction starts declined only 9%, according to BD+C .

Reduced access to credit, higher credit rates, rising vacancy rates, and a downturn in rental rates forced developers to respond quickly: projects that were ready to start were cancelled or held up to redo financing or deferred until occupancy and rental rate prospects improved.

However, the abrupt downturn in commercial starts is not reflected in the monthly construction spending report for October. Jobsite nonresidential construction spending rose 1% in October and has declined only 0.4% since the long building boom peaked in June. Jobsite spending increased 1.3% in October for private, “for lease” construction of hotels, offices, and retail buildings, notwithstanding reports of projects being halted during the construction phase. Month-to-month construction spending increased 0.8% for public and institutional buildings.

Looking ahead, the improving credit situation means that nonresidential construction starts are expected to rebound partially, but continue to trend down; expect declined of 10-12% in the FY ending next summer. Most projects that have already started will continue, so jobsite construction spending will drop only about 3%.

Hospitals and hotels will be the strongest markets during the weak year ahead, with expanding jobsite activity and increased starts for hotels but not for hospitals. Hotels are getting a boost from the transition that's taking them from a place to stay once you get to your destination to destinations themselves. Hospital construction is being supported by still growing patient revenue collected from insurance companies and the federal government, and may get a boost from added federal spending provided by the incoming Obama administration.

Retail is currently the weakest market, suffering from a downturn in consumer spending a year ago and rapidly falling building asset values which make buying cheaper than building.

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