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Aug. 29, 2007 - McGraw-Hill, Reed, AIA, NAR signal strong construction but office market may weaken

August 29, 2007
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Three private indicators of construction activity remained generally positive regarding nonresidential construction despite continued bad news from housing and credit markets. On Aug. 22, McGraw-Hill Construction (MHC) reported that the value of new construction contracts reported by the firm tumbled 11% in July, seasonaly adjusted, and was down 13% year-to-date (YTD) in the first seven months of 2007 compared to January-July 2006. MHC explained, “Nonresidential building in July dropped 23%. In June, contracting had surged 27% with the help of five massive projects valued each in excess of $500 million, while the largest nonresidential projects in July were two office buildings valued each at $200 million. If June’s five massive projects are excluded, then nonresidential building in July would be down just 4%.”

Nonresidential building was up 1% YTD. Nonbuilding construction rose 13% for the month and 5% YTD. Total nonresidential construction was down 11% for the month but up 2% YTD. Residential building starts were down 11% for the month and 26% for the year.

Reed Construction Data, which also collects information on new contracts, reported that YTD total construction was down 1.7%, with nonresidential up 20% and residential down 21%. Also on Aug. 22, the American Institute of Architects (AIA) reported that in July, its monthly survey of 300 architectural firms recorded the second highest percentage of firms with increased billings in the 12-year history of the index. AIA’s sub-indexes for commercial/industrial and institutional practices set records; residential and mixed-practice firms were also solidly positive.

The commercial real estate market is still doing well, the National Association of Realtors (NAR) reported on August 21. NAR’s Commercial Leading Indicator for Brokerage Activity, a composite of 13 variables selected to reflect future commercial real estate activity, rose 0.5% in the second quarter to the highest level in the 17-year history of the index. NAR said, “Net absorption in the office and industrial sectors in the fourth quarter of 2007 is expected to be 30-40 million square feet, with about $365-375 billion in new completed commercial construction activity, compared with $343 billion…reported in the second quarter of this year.”

However, recent cuts in real estate and financial employment could signal trouble for office construction. NAR said it expects its membership to fall more than 4% in 2006, the first drop in a decade, the Associated Press reported Aug. 22. There were 1,211 “mass layoff events” (layoffs involving 50 or more persons from a single establishment or permanent location), seasonally adjusted, in July, the Bureau of Labor Statistics (BLS) reported. That was nearly identical to the total in June and up just 5% from July 2006. But finance and insurance establishments had 39 events, up 26% from June and 50% from July 2006. (Construction establishments had 88 events, down 17% from June but up 28% from July 2006.)  

The online version of Crain’s New York Business reported, “The fallout from the mortgage crisis has claimed thousands of local jobs. ‘So far we’ve seen triple the number of cuts in the mortgage area that we saw last year, and it’s only August,’ said John Challenger, chief executive of global outplacement firm Challenger Gray & Christmas. Job losses in August throughout New York and New Jersey topped 10,000, according to Challenger. CIT Group became the latest casualty, saying it would shutter its mortgage origination unit and cut 500 jobs. Earlier this month,…Capital One Financial Corp.…laid off 1,900 workers….One of the hardest hit was…American Home Mortgage Investment Corp. The lender filed for Chapter 11 bankruptcy protection on August 6 and slashed about 90% of its 7,500-person staff.” On Monday, Crain’s reported, “The financial services sector-the key driver of lower vacancy rates and higher rents in recent years-accounts for about one third of the space leased in Manhattan. There's now concern that firms will slash staff and relinquish space….Last week, Lehman Brothers chose not to take an additional 70-80,000 square feet at 399 Park Avenue. [However,] ‘There has been no slowdown in leasing activity,’ says Mitchell Konsker, a vice chairman at [leasing firm Cushman & Wakefield]. ‘There are still multiple tenants [competing] for open spaces.’”

In July, 322 metropolitan areas reported over-the-year increases in nonfarm payroll employment, 41 reported decreases, and 4 had no change, BLS reported today. Over time, employment change foreshadows demand for many types of construction. The largest over-the-year percentage increases in employment were reported in Gulfport-Biloxi, Miss., 10%, and Provo-Orem, Utah, and Columbus, Ind., 6% each. The largest percentage drops were reported in Flint, Mich., -3.3%, and Atlantic City, N.J., and Bay City, Mich., -2.6% each.

Tables from the Congressional Budget Office project that the Highway Account of the federal Highway Trust Fund, the source for the federal share of state road construction funds, will be $5 billon short of money needed to pay for the spending assumed in the 2005 authorization law, known as SAFETEA-LU, by the end of fiscal 2009. Such a shortfall would require a nearly 50% cut in new federal-aid funds beginning in October 2008, unless Congress changes the law or comes up with additional revenue.

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