Building Slowdown Goes Commercial [WSJ]
By SCOTT PATTERSON and KRIS HUDSON
March 4, 2008; Page C1
Cracks are starting to show in commercial construction.
For the second month in a row, the Commerce Department reported a decline in spending on nonresidential construction -- which includes everything from hospitals to office parks to shopping malls. The report yesterday showed construction spending fell 1.7% in January from December, the steepest drop in 14 years. While residential construction accounted for a big part of the decline, spending on nonresidential construction slid 0.8%.
[Chart]
Meanwhile, there may be an oversupply of shopping malls and office buildings after a period of intensive construction. It adds up to bad news for employment, the economy and investors.
While the boom in commercial construction wasn't as dramatic as in home building, the impact of a slowdown on the economy could be significant. Nonresidential construction accounted for 3.6% of gross domestic product in the fourth quarter of 2007, up from 2.5% five years ago and the most since the second quarter of 1988, according to Moody's Economy.com.
As home construction got caught in a downward spiral last year, nonresidential construction continued to expand at a healthy clip. Spending on nonresidential structures rose 16% in 2007, the biggest four-quarter increase since 1984, according to Morgan Stanley.
Signs of trouble cropped up at the end of the year. As credit markets tightened, office space sold in the fourth quarter dropped 42% from a year earlier, and sales of large retail properties declined 31%, says Real Capital Analytics, a New York real-estate research group.
If spending continues to slow, construction workers, who are reeling from the housing slowdown, face more layoffs. Construction jobs made up 5.4% of nonfarm payrolls in January. While that's down from a peak of 5.7% in April 2006, it's still above the long-term average of 4.9%, say economists at Payden & Rygel in Los Angeles, leaving room for more job losses.
Nonresidential construction payrolls, down 2.7% in January from their recent peak in March, posted year-over-year declines in December and January, the first such drops since August 2004. A construction slowdown will be especially tough on specialty-trade contractors, such as plumbers, painters and electricians, who account for about two-thirds of overall construction payrolls. This could spell trouble for consumer spending, which accounts for two-thirds of the U.S. economy.
Workers on commercial projects take home fatter paychecks than those who build houses. Big commercial construction companies typically hire unionized workers with specialized skills, such as crane operators who work many stories above the ground building skyscrapers. In 2005, the latest data available, nonresidential workers made an average $46,460 a year, 13% more than residential workers, according to the Center for Construction Research and Training, a nonprofit group affiliated with trade unions. Some specialized workers can earn more.
In the past few years, builders aggressively put up stores and strip malls amid easy financing and resilient consumer spending. Spending on construction of shopping centers leapt 67% in 2007 from 2005 levels.
Last year, developers built 144 million square feet of retail projects in the top 54 U.S. markets and are slated to build another 131 million square feet this year, according to Property & Portfolio Research Inc., a Boston research company. Property & Portfolio Research calculates that demand justified 36% of the new space built last year and will support 15.7% of the space slated to be completed this year.
A sign that construction is about to cool off, perhaps sharply: The American Institute of Architects' monthly index of billings at architecture firms was down 14% in January from its peak in July. That means fewer construction projects will start this year, said AIA Chief Economist Kermit Baker.
A slowdown in commercial construction could add to the stock market's woes, as many investors have been counting on a second-half rebound to resuscitate dwindling corporate profits.
As building slows, demand for construction materials such as lumber, concrete and heavy machinery, which has been hit by the weak housing market, will slacken further. It will hurt sales of medium and heavy trucks -- which, largely because of the housing turmoil, fell 23% in 2007, according to trade publication Ward's Automotive. Sales of light trucks, often used by construction workers, also will suffer, another headache for auto makers General Motors Corp. and Ford Motor Co.
Another problem: Property values of commercial real estate are declining. A Moody's index of commercial real-estate values fell 1.5% in December from the previous month. It was the fourth steepest monthly decline in the seven-year history of the index, which nearly doubled from the end of 2000 through October.
Moody's expects a peak-to-trough decline of 15% to 20% in commercial real-estate values, returning prices to where they stood about four years ago. Goldman Sachs Group Inc. analysts have projected a drop of as much as 26%.
Retail is one of the more vulnerable sectors of commercial real estate, tied to the housing market and consumer spending. As the economy lists toward recession, retail property stands to suffer higher vacancy rates, constrained rent growth and declining values. Results for publicly traded retail landlords look healthy. After several years of rapid expansion by retail tenants and strong spending by shoppers, real-estate investment trusts that own and develop retail properties boast occupancy rates in the low- to mid-90% range. Many claim little trouble so far in replacing bankrupt or otherwise failing retailers that have vacated their stores.
The outlook is souring. Retailers have reported a slowdown in sales. Wal-Mart Stores Inc. and J.C. Penney Co., among others, have pared expansion plans. Electronics seller Best Buy Co. has reined in its quarterly earnings forecast. Talbots Inc., Movie Gallery Inc.'s Hollywood Video and numerous home-furnishings retailers have announced store closings. Others, including Bombay Co., have liquidated under bankruptcy protection. |
