An unusual aspect of the present economic downturn is the fact that commercial construction has not been hit particularly hard. High vacancy and interest rates have typically gone hand in hand with sour economic times, yet the market is doing just fine for the time being, at least as far as supply and demand goes. In addition, interest rates are down. According to a forecast for 2002 published recently by Buildings Magazine, the continually robust modernization market will balance out the any effects of a lull in new construction spending. Market by market, the construction industry will experience growth at different rates. In a few markets, it will experience a decline. Overall, however, the construction industry should finish the year in a good place. One industry indicator, F. W. Dodge Construction Outlook 2002, is actually reporting that the rate of economic growth in the industry will accelerate, keeping close to last year's estimate of $481 billion.

The education market will continue to be a bright spot in 2002, with a projected increase of 10% in new project spending. On the downside, the office market is expected to decline by 14% and the retail market is expected to drop by 8%. Slower employment growth in the technology sector has taken a toll on commercial construction, but this market should eventually rebound as the economy improves.

Previous downturns have shown that when times get tough, economically speaking, modernizing old buildings becomes a popular alternative to constructing new ones. With this in mind, modernization activity in all its forms can be expected to stay strong throughout the year. High churn rates in corporate and institutional facilities, infrastructure improvements and changes in building use are propelling this trend.

F. W. Dodges Construction Outlook 2002 has designated certain areas of the construction market as likely to fare poorly and others as being ripe for robust growth. On the potentially poor side, single-family housing market is expected to drop during the first part of the year due to waning consumer confidence and a tepid job market. Yet because consumer demand for houses typically goes up as mortgage rates go down, F. W. Dodge predicts a year end total of 1.175 units sold, only a 2% drop from last year, which makes little difference in dollar terms.

F. W. Dodge expects the public works market to rise by about 2%. This is based on the belief that infrastructure construction, like highways and bridges, will balance out other, less dynamic, areas of public works construction. Electric utilities construction is expected to slow down after a four-year growing spurt as the post-deregulation surge in new power plant construction finally eases. Income real estate is expected to slip an additional 3%, coinciding with square footage slipping 5%. Hotel construction is expected to see the sharpest decline, while stores and warehouses will experience more moderate retrenchment. Apartment construction is the income property category that seems best suited to avoid a decline.

Institutional construction is projected to climb by 3%, due to growth in the school building and healthcare facilities markets. It is believed that construction of other institutional building categories will decline. F. W. Dodge predicts the construction of manufacturing facilities to rise by 2%. Yet despite its projected nose upward, manufacturing construction is in an overall slump, down 35% in dollar terms from its hey day in 1997.

Emerging Trends in Real Estate 2002 suggests that the real estate market is relatively well positioned to weather the current recession and will pick back up in the forthcoming recovery. To begin with, Emerging Trends points out, real estate markets have been in equilibrium. There is a growing amount of empty office properties, but this follows a period of extremely robust occupancy levels. The markets for apartments and warehouses have been stable. Although a shortage of buyers doesn't exactly bode well for their income, the long-term endurance typical of these markets should outlive any temporary turbulence. The second trend is that the current risk-return profile is an attractive one. Third, supply is under control for the most part. Lenders have kept a tight leash on developers, especially in downtown office and hotel markets. In addition to these trends, current lease structures are offering protection, allowing for net operating incomes to continue to grow. Finally, low interest rates are helping to protect values. Few investors in need of quick cash have had to put buildings onto the market at bargain prices.

Source: Forecast 2002: Setting the Stage
Buildings, Jan. 24, 2002
http://www.buildings.com/default.asp