Interest Rate Roundup

Monday, March 03, 2008

Construction activity slumping further; Keeping an eye on commercial

So we got the latest construction spending figures this morning. In January, overall spending dropped 1.7% -- much worse than the 0.7% decline that was forecast and the biggest decline in any month going back to January 1994. December's monthly change was also revised down to -1.3% from -1.1%.

Now here's where it gets interesting. Residential spending fell 2.9%, exactly what you would expect given what we know about housing. But nonresidential spending also declined for the second month in a row: -0.8% after a -0.5% drop in December. Total PRIVATE non-residential spending fell 1.2%, let by a 3% drop in lodging spending, a 5.6% drop in communication spending, a 2.5% decline in transportation spending and a 4.5% fall in power spending.

The commercial construction and real estate markets continued to prosper after residential began rolling over. But now the commercial market appears to be losing steam, just as I've been expecting it to for some time. The Wall Street Journal dug into the potential ramifications of that unfolding trend this morning:

"After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

"As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

"William Tanona, a Goldman analyst, expects total write-downs of $7.2 billion by Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley in the first quarter. Those firms had combined commercial-real-estate exposure of $141 billion at the end of the fourth quarter."


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