Interest Rate Roundup

Monday, January 05, 2009

Construction spending down, but not out ... yet

The latest figures show construction spending was down, but not out, in the month of November. Total spending declined 0.6% against market expectations for a decline of 1.4%. October's decline was also revised to just -0.4% from a previously reported drop of -1.2%.

The residential market continues to be a lead anchor, with private residential spending down 4.2% -- the biggest decline since July's -6.2% reading. Private nonresidential spending, on the other hand, increased 0.7% after a 0.4% decline in October. Within the private nonresidential sector, spending on lodging was up 0.7%, spending on office property rose 0.9%, spending on transportation projects jumped 3.2% and spending on power facilities climbed 5.3%.

The problem? This nonresidential strength simply isn't going to last. After all, as the New York Times noted yesterday, vacancy rates are rising, rents are falling, and commercial real estate financing conditions are much tighter now than they've been in years. A brief excerpt:

"Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

"With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market "since the wrenching 1991-1992 industry depression."


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