Strong start, slow finish for nonresidential

June 01, 2001 |

Total nonresidential construction spending through the first two months of 2001 continued to run an exceptional 9.4 percent higher than during January and February last year. However, the growth is likely to slow, finishing the year at 4 percent, more than 7 percent below spending growth for 2000. In 2002, the growth rate is projected to rebound to 7.5 percent.

The strength of the nonresidential building sector of construction — which encompasses the broad swath of commercial, industrial and institutional work — was last year's most pleasant surprise. The nonbuilding sector grew more slowly in 2000 than anticipated, and residential building expanded at a more subdued pace than in 1999, as expected. But after only 3.6 percent growth between 1998 and 1999, nothing suggested a gain more than three times as strong — 11.3 percent — in the nonresidential sector in 2000.

Commercial spending greater

Total spending for the new construction or renovation and remodeling of commercial buildings was estimated at $131.2 billion during 2000, an increase of almost 10 percent from a 1999 total that had expanded by 8.1 percent from the healthy 1998 level.

The office sector again led the way with double-digit growth, while hotel/motel projects eked out a 2 percent gain following 7.6 percent growth the year before. The biggest surprise was the second consecutive year of 6.6 percent spending growth for retail buildings, even as household spending gains slowed and evidence pointed to an oversupply of space in many metropolitan areas.

The U.S. Commerce Department estimates that approximately $54 billion was spent for the construction of new, or the renovation and remodeling of existing, office space during 2000. This was almost 16 percent more than during the previous year. Though office vacancy rates nationwide remained extremely low in most metropolitan areas entering the new year, indications are that spending for new space is weakening and that absorption rates for new space returning to the market are falling. Growth in the office sector should continue to be solid this year, though held to a single-digit figure for the first time in seven years.

Total commercial-sector spending during January and February of this year was $20.5 billion, 6.6 percent greater than over the first two months of 2000. Office-building construction was up 18 percent from a year earlier, while retail was ahead at a more subdued pace of 3.6 percent. The hotel/motel sector, however, showed the impact of the economic slowdown as spending plunged 9.9 percent between January and February of 2000 and the same months this year.

Industrial momentum carries over

Industrial construction enjoyed an outstanding rebound in 2000, and some momentum has carried over into the early months of this year, with spending in the sector this January and February coming in 30 percent higher than during the first two months of 2000.

Institutional expands at solid rate

Spending for institutional buildings totaled an estimated $132.5 billion last year, up more than 11 percent from the 1999 level. Although growth in religious building construction slowed between 1999 and 2000, nearly all other subsectors recorded much stronger numbers last year than over the previous two years.

Prior to 1998, the construction of hospitals and other health facilities had grown for six consecutive years. After falling by 0.6 percent between 1998 and 1999, health-care construction soared by 11.6 percent during 2000.

Spending for the construction of new educational buildings, and for the expansion or renovation of existing structures, continues to grow at an extremely healthy pace. During 2000, overall educational construction spending increased at an extraordinary 17.7 percent annual rate — better than twice the 7.8 percent increase recorded for the previous two years. Although more difficult credit market conditions for private educational construction are likely to prevail during 2001, publicly funded work is expected to again grow at a double-digit rate.

Through two months of this year, both the educational and health sectors were growing at rates half as strong as during 2000. But both sectors continue to expand at solid rates, with educational spending growing at a 9.3 percent pace and health-care spending increasing 6.5 percent through the first two months of this year.

Slow down ahead for three sectors

Overall, nonresidential spending growth is expected to slow this year in each of the commercial, industrial and institutional categories and then improve during 2002. Because of its extended period of positive growth, the commercial subsector is expected to experience the most notable spending slowdown. The erratic behavior of the industrial subsector should continue as its growth slows by double digits, while institutional spending growth also should slow.

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