IRVINE, CA-Housing construction is currently the one bright spot for construction spending nationwide, Julie Zisfein, senior associate and economist at Auction.com Research here, tells GlobeSt.com. Both commercial and institutional construction have shown either flattening or significant decline of late, leaving the housing sector responsible for any small gains in spending.
As we reported earlier this week, the US Census Bureau of the Department of Commerce has revealed that construction spending during May was estimated at a seasonally adjusted annual rate of $874.9 billion, which is 0.5% above the revised April estimate of $870.3 billion. The May figure is 5.4% above the May 2012 estimate of $830.4 billion, but has not met economists' expectations for an economy that some experts say should be well into recovery by now.
While the figure is not as positive as was predicted, it's important to note that spending is still increasing, but momentum has slowed considerably, falling short of expectations, Zisfein says. “It's important to break it down and not look at just the number. Residential construction has seen lots of growth, and it's not surprising. Construction for both single-family and multifamily homes is thriving right now—in fact, residential spending is at a level seen last in 2008.”
Before the housing boom, construction spending nationwide was around the $400-billion mark, she says. It is now at roughly $328 billion, having made huge jumps throughout 2013. “Other measures of housing recovery show slow and steady recovery, and construction is a leading indicator for housing. There's enough demand on current houses that investors and developers feel new home development is important, and this is important to the overall economy.”
Spending on nonresidential commercial construction, on the other hand, has flattened out recently, Zisfein comments. “It had been slowly growing, but since the end of 2012, spending has kind of flattened out. It had been growing at about 10% annually, and now it's flat for the first time since the recession.”
As the office and retail sectors continue to trudge along in the recovery, vacancy rates in these sectors have come down from recession highs, but still remain relatively flat. “If there's no demand for existing buildings, it's hard to justify building more,” Zisfein points out.
Not surprisingly, institutional construction spending, the third component to the total construction-spending figure, has seen significant decline lately, she adds. “This has been a pattern since the recession. Educational endowments have shrunken substantially, and annual-giving numbers are down across the board. Since the beginning of the year, institutional construction spending declined from $150 billion to $137 billion, its lowest annual adjusted rate since 2005.”
Part of the reason for the decline in institutional construction is the government's reduction in spending due to the sequester cuts. “People are still using a wait-and-see approach,” says Zisfein. “Government-spending cuts across the board have resulted in government-construction spending flattening.”
As we move into 2014, demands for office, warehouse and retail space will eventually begin to increase, fueling more construction spending, Zisfein predicts. “Hopefully, residential construction doesn't get back to the levels that it was before the crisis. In terms of healthcare construction, in general, we have seen people waiting to see what's happening with Obamacare and how that will affect healthcare real estate—it will all depend on the legislation for healthcare.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
