Commercial Construction Market Update

Where do we go from here?

03:01:15 PM on 07/22/2010

In this blog I will attempt to address the second question posed in my previous blog - When will the nonresidential construction market be back on the growth track again?

And it will be an attempt only because as the Danish physicist Niels Bohr supposedly once quipped, “Prediction is very difficult, especially if it is about the future.” To complicate the situation, this time around the nonresidential construction market recovery might lack any historical precedence.

The problem starts with the multi-faceted nature of the nonresidential construction market. It is massive in size and comprises an array of building types that have specific, even exclusive, drivers. Turnaround in a colossal, dynamic market with multiple moving parts is rarely a harmonized maneuver.  

As I previously mentioned; the market seems to be stabilizing. Productivity in the industry continues to improve. Project financing has eased a bit recently, and owners and developers are tapping into new sources of funding like private-public partnerships and private equity.  

The retail sector will likely be the first nonresidential sector to show some sustainable growth, possibly commencing during the second half of 2011.
The office sector will continue to suffer from an uncertain economic recovery due to the easing of corporate profits and rising office vacancy rate, which is forecasted to peak in 2011. Any significant growth in this sector is unlikely until 2012. Additionally, the hotel sector is expected to be shackled by a lackluster travel and tourism industry until 2012.

On the institutional side of the market, state and local governments,
the primary drivers of educational building construction, will be troubled by the tough financing environment and lower tax receipts. This year, many states are facing large budget deficits including California, New York, Illinois, New Jersey and Florida. It is still uncertain as to when the state and local governments will be able to repair their balance sheets and start to infuse substantial amount of funds into public projects.

In the healthcare sector
, the potential of diminished profits due to higher borrowing costs and escalating healthcare costs is expected to reduce healthcare facility construction. Although the long-term impact of the new healthcare legislation remains unclear, especially for facilities construction, the rise in the number of people with insurance coverage is expected to increase the demand for healthcare services and consequently for healthcare facilities. This sector is likely to show some growth during the second half of 2011.

Most indicators seem to predict that the market will not experience any broad, significant growth until 2012,
which is unlike what we have experienced in many of the past nonresidential construction cycles.

Have you seen any indication that we may be back on track sooner than later?

Best regards,
Andy Nag


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