Commercial Construction Market Update
This time it’s different!10:13:09 AM on 12/09/2009
The onset of the trough in a cyclical industry like commercial construction often enthuse folks to compare the elements of the current downturn with those in previous ones. And most comments on the topic tend to run the gamut from “Seen it before” to “This time it’s different”. The question is, in midst of this deep commercial construction trough, have we seen it all before or is it really different this time around?
The problem with capturing the essence of a complex and multi-faceted industry like ours in cut-and-dry terms like those mentioned above is a futile exercise, even more so in a volatile macro-economic environment like the one we face at present. So, the short answer is both – there are elements that are predictable and ones that are atypical, if not entirely novel.
Since the 1970s, we have had five distinct cycles in commercial construction; including the current one. At a fundamental level, the present one is a “seen it before” cyclical downturn; however, a noticeable feature, relative to the previous four, is that the magnitude of the decline, from the peak to trough, is forecasted to be significantly greater. The cycle duration also seems to have lengthened over time.
Another “seen it before” aspect is the decline in commercial construction following a downturn in the residential market. But the scale of overbuilding in the commercial market is not even remotely comparable to the unprecedented housing market inventory build-up we had during the past decade, before the housing collapse. This suggests that the commercial market is likely to escape an overly extended period of decline like the housing market. This does on necessarily imply that it will jump start to a meaningful growth trajectory.
Commercial real estate lending tightens during down cycles but the extent and expanse of the credit crisis preceding the current market decline threatens not only potential new projects, but also existing projects whose debt is about to mature and need refinancing. Although the debt-refinancing situation is not unique during a down cycle, the scale of it in this current cycle certainly is.
Another point that comes to the front, through the maze of market forces driving the downturn, is that the sheer scale of the changes occurring is extraordinary. And so it is with the antidote provided to alleviate the impact of the downturn. The robust monetary and massive fiscal stimulus unveiled to counter the recession is unparalleled. But the pertinent questions are: did it favorably impact commercial construction and if not, will it do so going forward?
To date, the American Recovery and Reinvestment Act (ARRA) had negligible effect on commercial construction. The Term Asset-Backed Securities Loan Facility (TALF) program too has done little to unfreeze the credit markets for commercial real estate. Anecdotal evidence seems to suggest that bureaucratic tangle, among other issues, is responsible for the ineffectiveness of the federal initiatives. Precarious state and local government finances, brought about by the recession and low tax receipts, do not help the situation either for publicly funded projects.
To revert to the initial question as to whether we have seen it all before or this time it’s different, it seems that history repeats itself but with twists and this time around with more twists than usual.
So, what’s in store for commercial construction in 2010? For a glimpse, stay tuned to Kawneerosphere … And, be sure to give me your insights as well.