The U.S. nonresidential construction market may continue to see slow growth for most of the rest of 2003, but it may begin recovery by the middle of 2004 as excess capacity continues to be worked through, according to FMI’s Construction Outlook — Third Quarter 2003.
Office construction, especially in areas affected by the hi-tech slump, will continue to falter for the next 12 to 18 months. Industrial space markets have made progress toward positive absorption rates in many markets due to sharply curtailed new construction during the past three years. Unfortunately, it will continue to have excess supply until new orders and plant capacity utilization rates pick up. At that time, markets could improve rapidly given the age and condition of much of the manufacturing facility stock. Hotel construction is expected to slip in 2003 before recovering in 2004 as innkeeper balance sheets improve with a more confident traveling public.
Retail store construction volumes are at relatively high levels despite moderate slowing this year and could improve along with an overall economic recovery in 2004.
The value of warehouse construction put in place in June was $12.1 billion, an increase of 1.5 percent from June 2002. Warehouses have faced a similar fate to that of manufacturing facilities in recent years — but with a positive twist. Although excess capacity is nearly as big a problem with warehouses as with manufacturing, the imported goods that are putting U.S. manufacturers out of business still need to be stored somewhere domestically.
Real change in private inventories subtracted 0.77 percentage point from the second quarter change in real GDP, after subtracting 0.82 percentage point from the first quarter change. Private business reduced inventories $17.9 billion in the second quarter, following increases of $4.8 billion in the first quarter and $25.8 in the fourth.
The value of retail construction put in place in June 2003 was estimated to be $61.2 billion (SAAR), down 0.3 percent from June 2002. In the face of pinched retail profits, construction volume has been flat or down in many retail sectors — even in some that were hot last year like freestanding drug stores. However, indicators that drive retail construction like residential construction and retail sales are healthy and may lead to increased retail building in 2004. A success story this year has been the reemergence of that retailing relic, the enclosed shopping mall.
Looking back over the first half of 2003, the U.S. retail sector and store construction demand have continued to feel the impact of squeezed retail profits resulting from bargain-hunting consumers worried about job security and about the outcome of the war with Iraq. Spring’s cold, wet weather further dampened shopping. Retail and food services sales for May were $308.8 billion, up 4.2 percent from the same period a year ago. Retail trade sales alone were down 0.1 percent from April, but were 4.9 percent above last year.
Mall construction certainly seemed out-of-style in recent years as witnessed by the 25 percent decline in the value of construction put in place in 2002. New or retrofitted strip shopping and up-scale lifestyle centers encroached on mall territory and worsened already reduced foot traffic and purchases-per-visit that occurred after Sept. 11.
However, mall construction is bounding back to more normal levels due to several factors.
The amount of leasable space in malls is not growing as fast as predicted due to reduced new construction in recent years and to increased demolition of old or out-of-date malls. The market is further strengthened by low borrowing rates that are enabling troubled owners to refinance and maintain ownership. At the same time, investors are attracted to its relatively attractive returns, which are considered more stable since they hinge upon the buoyant American consumer.
The second quarter of 2003 has been a tumultuous experience. Exemplifying this is the nation’s consumer confidence, which jumped up in May, remained flat in June, and fell in July. But total construction put in place fell in April and May, rising again in June. Total private construction remained flat in June with an increase in public construction volume driving the increase in total construction. Total private and public construction put in place is approximately 2.0 percent higher this June than June 2002. Public power construction contributed heavily to this rise.
Office, commercial, and health-care construction are the types of construction that saw the largest increases in June with decreases in lodging and manufacturing largely offsetting these gains. The ups and downs of the second quarter are probably a good indication of the bumpy road ahead as the nation’s economy struggles to recover.