Consulting-Specifying Engineer - January 2009 - (Page 46) Construction spending ($ millions) 2005 Total Education Healthcare Office Retail Hotel Public safety Religious Amusement Manufacturing Hospital Assisted living Medical office K-12 University 303,239 79,575 34,413 45,857 70,248 12,840 7,284 7,743 15,268 30,012 21,663 2,678 9,194 46,762 24,987 2006 342,045 85,081 38,489 54,170 76,673 17,984 7,800 7,746 18,990 35,113 25,984 3,545 8,111 51,216 26,569 2007 402,242 96,085 42,904 64,702 88,478 28,602 9,869 7,454 21,610 42,538 29,551 3,684 8,532 58,391 29,887 2008 450,790 104,218 45,704 73,261 85,910 37,239 12,285 6,866 23,206 62,102 31,003 4,382 8,838 61,300 35,080 2009 forecast 448,363 105,025 46,050 74,500 78,125 38,325 12,050 6,325 22,163 65,800 31,000 4,750 8,480 60,080 37,000 and still-weakening auto sales. The volume decline at other retailers was minimal. Real estate investors now see retail as the least attractive commercial market. In the past year, the retail vacancy rate has risen from 10% to 15% and rental rates have dropped about 4%. The vacancy rate will rise several more percentage points by the end of summer, and rental rates will keep slipping at the same pace into 2010. Office construction spending was 10% higher at the end of 2008 than at the end of 2007, but will slip slightly through early 2010. Developers stick with office projects longer than retail projects because rents adjust to worsening economic conditions more slowly, and the more stable public and nonprofit sectors provide a significant share of office tenants. Starts of government office buildings were rising through last summer before the impact of the recession hit public budgets. The small decline in nominal job-site construction spending includes a 10%-plus fall in the square footage of office project starts by the middle of 2009. Substantial layoffs are underway in office-based industries. The finance and professional and business services industries cut 410,000 jobs from July to November with larger cuts expected early in 2009. In the past year, the office vacancy rate rose from 15% to 17%, and office rental rates fell marginally after a five-year rise. Hotel market The hotel construction boom ended last spring. Construction spending nearly quadrupled over three years but did not grow in the five months through October 2008. This market is now dominated by large destination hotels, often built together with condos, retail, and office space or casino or resort facilities. This is a different market than 60-room motels by the Interstate exit. The traditional lodging market is suffering the recession in parallel with the retail market. But construction spending for the destination hotel market, while stalled, is not expected to decline significantly in 2009, though project starts will drop more than 10%. These hotels cater heavily to foreign visitors. Data sources: Historical: Census Bureau; Forecast: Reed Construction Data Recession worst in Midwest and Northwest The current recession began in the industrial Midwest and the busted housing markets in the Southeast and Southwest several years ago, but is only now arriving in the oil states on the Gulf Coast with cancellations of energy industry expansion plans. Each region’s economic condition is set by the health of its key industries. The Great Lakes economy, dominated by motor vehicle and other manufacturing, has declined further relative to the rest of the country in the final months of 2008. The expected emergency loan to the auto companies replaces private credit no longer available, but comes with spending cut mandates that will reduce industry labor costs in 2009 and further weaken the region’s economy. Employment and income have weakened sharply in recent months in the Pacific Northwest (Idaho, Oregon, and Washington) because of the heavy reliance on manufacturing, especially lumber, and electronics—two of the weakest industries in the United States now. All three state governments have been forced to cut spending and increase taxes. The New England and Mid-Atlantic states had better-than-average economic performance through October because of their heavy reliance on financial and professional employers. This is now ending with the beginning of significant finance industry layoffs in October, and business and professional services layoffs in November. These layoffs, unlike in manufacturing, are not typically recalled when business begins to improve, so the Northeast economy will be a declining trend for at least three quarters. New York has the most risk because the securities industry’s annual bonuses are the largest source State economic activity index of personal income in New York City. Annual percent change, last 3 months The Pacific, Rocky Mountain, and South Great Lakes -3.3% Atlantic regions all are faring worse than the rest of the country at the beginning of 2009. Pacific -2.8% Each region is suffering from manufacturing Rocky Mountain -2.5% layoffs, declining tourism and leisure indusSouth Atlantic -2.4% try revenues, and very depressed housing Plains -1.6% markets, which is limiting spending in other Mid-Atlantic -1.4% construction sectors. This region has a net New England -1.3% outflow of illegal immigrants, which reduces the need for additional building space and Gulf Coast +1.0% facility capacity. Source: Federal Reserve Bank of Philadelphia 46 Consulting-Specifying Engineer • JANUARY 2009
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