Recovery in Nonresidential Construction Lagging, not Expected Until Next Year

March 1, 2011
Hotel and retail sectors projected to lead the way

Economists who follow the design and construction industries are pointing to a halting recovery in nonresidential construction, retreating on predictions of a recovery in 2011, ZweigWhite, source of business-management services for architecture, engineering, planning, and environmental consulting firms, reports in the Jan. 14 issue of The Zweig Letter, its weekly management journal.

According to The American Institute of Architects' (AIA's) semiannual Consensus Construction Forecast, nonresidential-construction spending will drop by 2 percent in 2011. A similar survey in July 2010 pointed to recovery in 2011.

"The key factors that have prevented an accelerated recovery include historically low lending rates for real-estate projects, the lingering effects of general overbuilding, and an unfavorable bond market that has hampered the ability for municipalities to get the requisite funding to build new schools and hospitals," Kermit Baker, AIA chief economist, told The Zweig Letter. "Conditions should improve later this year and gain momentum as we move into 2012, particularly for hotel-, retail-, and office-building projects."

The AIA expects an increase in nonresidential-construction spending of 5 percent (adjusted for inflation) in 2012.

Jim Haughey, director of research and analytics for Reed Construction Data, is a bit more optimistic about the timing of a recovery.

"Looking at the recent trends," Haughey says in the Jan. 14 issue of The Zweig Letter, "nonresidential (construction) starts have picked up quite sharply from the falloff at the height of the financial problems last year. ... The nonresidential-construction pipeline is gradually being rebuilt. In recent credit trends, we've seen that investors have started buying bank real-estate loans at deep discounts, and by deep, I mean as much as 50 percent or 60 percent in some cases. This is providing the capital for a very small expansion in new project loans."

The AIA projects construction to fall 11.8 percent in the industrial sector, but rise slightly in areas such as health-care, church, and recreational facilities, in 2011.

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