Commercial/industrial
construction outlook almost uniformly upbeat
Since commercial and industrial facilities led the nonresidential downturn
at the beginning of the decade, it’s probably not surprising that
these sectors are projected to lead the upturn. Our consensus forecast
panel is projecting a 2.5 percent increase in commercial construction
activity in 2004 and a very healthy 11.3 percent increase in industrial
construction.
The office construction market is the one commercial
market that our forecast panel feels is still in transition. After declining
by double-digit rates in 2003, the outlook for next year is mixed. The
consensus is for stable rates of construction, or possibly off just a
bit, in 2004.
Offices have been the most volatile commercial construction
sector in recent years. Office construction declined by more than 50 percent
from its high earlier this decade. However, due to the “dot.com”
craze that peaked in 2000/2001, the office sector was also the most overextended.
During this period, companies were leasing space not only to accommodate
their rapid growth rates, but also in anticipation of future growth. When
the technology market crashed, a lot of office space went back in the
lease market.
National office vacancy rates hit a low for this
cycle of 7 percent to 8 percent in late 2000, and since then have climbed
to over 14 percent in downtown locations and over 18 percent in the suburbs,
according to CB Richard Ellis. The lowest vacancy rates are now in the
Northeast and in California markets outside the Bay Area. The highest
office vacancy rates are in heartland markets, reflecting the downturn
in manufacturing and transportation.
After a modest decline in 2003, the consensus forecast
is for a rather healthy rebound in retail and other commercial construction
in 2004. All of the forecast panelists are expecting gains in this sector.
The reason for the optimism is that retail construction
has held up remarkably well during this past construction cycle. Retail
sales have managed to increase every year during this past economic cycle,
so there has continued to be pressure on retail space. This helped to
avoid the development of an overhang in retail space that would need to
be worked off once the economy improved.
While strength in the retail construction market
will help generate a rebound in the construction industry, it may not
hold as many opportunities for architects. The strongest growth in retail
activity has been in the discount category; a category dominated by large
chains where store formats exhibit minimal variation and, therefore, where
design input often is limited. On the foodservice side of the market,
much of the growth has been in fast-food chains, again a sector where
design involvement often is minimal.
The hotel and industrial building sectors are projected
for strong gains next year. The consensus forecast is for 4.4 percent
growth in hotel/motel construction and 11.3 percent for the industrial
category. In both cases, however, these gains reflect only a small portion
of the losses from the pre-recession highs.
Institutional market
still recovering
Though the broader economy is beginning to recover, governments are still
feeling the pinch from declining revenues. Traditionally, it takes a while
for a weakening economy to be felt in government budgets. Likewise, it
takes a while for a strengthening economy to produce increases in government
revenue. While the federal government can deficit spend, many state and
local governments must maintain a balanced budget.
Furthermore, while the stock market has made impressive
gains since earlier this year, it is still well below the levels of early-to-mid
2001. Institutions that rely on endowments to finance their construction
activity still may be hesitant to launch into new building projects.
The net result is that many of the institutional
building categories are still a bit sluggish at present. The consensus
forecast is for essentially flat levels of spending in the institutional
category for 2004, with our forecast panel in a relatively narrow range
of projected small declines to small gains for the category overall.
Our forecast panel projects a modest decline of
1.5 percent in health-care construction in 2004. The health-care construction
market has dipped a bit in recent years, mostly in response to private
market forces like cost management, consolidation, and other efforts to
boost profitability. There continues to be a shift away from large regional
hospital complexes toward clinics, managed-care facilities, and assisted-care
facilities. However, the aging of the population (seniors are the group
spending the most on health care) will keep this market strong in the
years ahead.
Our forecast panel is projecting flat levels of
education construction activity in 2004, although forecast panelists who
track only private construction activity are more upbeat about the prospects
for this sector for 2004. Although demographics remain very favorable
for the education sector, particularly at the college level, state and
local government budget problems have slowed spending in recent years.
The consensus forecast for religious facilities
is essentially flat for 2004, with small gains projected in the public-safety
(police/fire, detention facilities, courthouses) and amusement and recreation
categories. Religious-facility construction has been hampered along with
most nonprofit categories with the downturn in charitable giving.
Public-safety construction, relying on public funding,
has slowed with government budget problems. However, some targeted federal
spending programs should provide modest growth in this category. Amusement
and recreation construction spending generally tracks the economy, so
a stronger economy will help this sector.
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