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Feb. 18, 2008 ― Government Sees Future For Plants, Data Centers, Hotels, Warehouses, Stores

By Ken Simonson
February 18, 2008

Industrial production (IP) at mines, utilities and factories rose 0.1% in January, the Federal Reserve reported on Friday.  IP in manufacturing was flat. Capacity utilization in manufacturing slipped to 79.7% of capacity, just under the long-run average of 79.8%. Together, weakness in manufacturing IP and capacity utilization imply a possible slower demand for factory construction.

The Fed stated, “Manufacturing capacity is estimated to increase 2.1% in 2008, the same amount as in 2007. In 2008, mining capacity is estimated to expand 0.7%, and utilities capacity is projected to rise 1.9%; both rates of increase would be slightly faster than for last year.” IP of construction supplies slumped 1.1%, reversing a 1.1% gain in December. The Fed noted, “production in January was 1.2% below its year-earlier level and about 4% below its peak in 2006.” Manufacturing construction rose 9% in 2007, the Census Bureau reported on February 1.

Communication construction soared 21% in 2007, and 6.0%, seasonally adjusted, from November to December. One driver is data centers. The Washington Post reported on February 3, “In Northern Virginia, for instance, 22 computer data centers have been built, and 24 more are on the away, according to Dominion [Energy]. Those hives of computer servers are often the size of a small Wal-Mart, and the company says they use about 25 times as much power.” The power usage is also contributing to demand for power plant and transmission construction.

Lodging construction soared 66% in 2007 but fell 0.7%, seasonally adjusted, in December. In a sign of a possible hotel construction slowdown, the Post reported on Friday that Marriott International “slashed its outlook for growth this year as concerns mount that the slumping economy is slowing down leisure travel. The Bethesda [Maryland-based] hotel chain said yesterday that revenue per available room-a key measure of the industry’s strength-would grow 3 to 5% in 2008, down from the 5 to 7% the company had been forecasting….Arne Sorenson, the chief financial officer, told analysts during a conference call that December and January bookings at suburban and airport Marriotts, as well as its limited-service brands, were weak. [Group bookings and business travel] seem to be holding up, Sorenson said.”

Warehouse construction climbed 11% in 2007, and 4.8% in December, seasonally adjusted. The Journal reported on Wednesday that “bullish Dallas-Fort Worth Metroplex developers [plan] to develop the largest amount of warehouse-distribution space of any of the country’s 54 major markets tracked by Property & Portfolio Research Inc., a Boston-based real-estate research firm…about 18.6 million square feet…up 12% from last year. [The] Riverside-San Bernardino, California, region…is in second place with 10.6 million square feet of new warehouse space on tap….Many developers in the Dallas-Fort Worth region are…pushing ahead with new warehouses, although the new supply will likely taper off next year, according to PPR.”

The outlook for retail construction appears mixed but generally weaker than in 2007, when commercial (retail, warehouse and farm) construction spending climbed 13% for the year but only 5.7% from December 2006 to December 2007, seasonally adjusted, and fell 1.1% from November. On Wednesday, Census reported that retail and food services sales in January climbed 3.9% from January 2007 and 0.3% from December after slipping 0.4% that month. Regarding retailers’ expansion plans, the Journal reported the following: “Chipotle Mexican Grill Inc….confirmed plans to open 130 to 140 new restaurants in 2008, compared with 125 in 2007” (Friday). “Tully’s Coffee Corp. said it is withdrawing its pending initial public offering. [Proceeds] would have been used to open new stores…” (February 8). “Peet’s Coffee & Tea Inc….is enlarging its profitable wholesale-grocery business with an eye on new East Coast markets. [Peet’s] plans to open 28 [stores by yearend], most of them in major East Coast markets” (February 6). “Charming Shoppes Inc. will close nearly 150 underperforming stores and shutter its new Petite Sophisticate chain….Among the stores being closed are about 100 Fashion Bug stores….The company, which specializes in plus-size apparel and owns the Lane Bryant chain, also cut its capital budget by 30% for the just-started fiscal year, which will result in a 50% drop in new-store openings” (February 6).

Import prices jumped 1.7% in January, driven by a 5.5% leap in petroleum prices but also by a gain of 0.6% in other prices, the Bureau of Labor Statistics (BLS) reported on Friday. Of items important to construction, the import price index for iron and steel climbed 4.2% for the month and 19% over 12 months; articles of iron and steel, 3.7% and 10%; articles of stone, plaster, cement, asbestos or mica, 0.4% and 3.5%; copper and articles thereof, -8.5% and 1.0%; and aluminum and articles thereof, -0.3% and -5.1%. The lower copper and aluminum prices may be short-lived. The Institute of Scrap Recycling Industries reported on Friday, “South Africa’s state utility is considering a complete power supply buy-back from both of the country's aluminum smelters plus one in Mozambique for the balance of 2008, which could remove around 1.5 [million metric tons] of aluminum from the global market.” The Wall Street Journal reported on Tuesday that a coal shortage has hurt “China’s output of steel, copper, zinc and aluminum as electricity is being diverted for domestic industry and household heat and electricity. China’s largest copper producer, Jiangxi Copper Co., shut down some plants, contributing to higher U.S. copper futures.” Also on Tuesday, the Journal reported, “Local and state authorities just pulled a plan to develop an elegant $1.2 billion transit hub [near the Ground Zero site in lower Manhattan], citing rising steel, concrete and cement prices as one reason.”

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Chief Economist, Associated General Contractors of America 703-837-5313; fax -5406; www.agc.org

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