Nov 1 2006 9:27AM | Permalink | Email this | Comments (2) |
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“How long will the nonresidential spending boom last”? is now the most common question in my inbox. This topic replaced “How deep will the housing collapse get”? that dominated the summer months. The recent stronger reports about the housing market put an end to that query. Housing, in turn, replaced questions about “How high will construction cost inflation be”? that was the most frequent question for almost six months. I got bored with this question very quickly. It was not as interesting as the previous hot topic, “How fast will home prices increase”? Everyone wanted to tell me how rich their house was making them.

The questions I get reflect what is keeping managers in the construction and related market up at night. The questions reveal what is making people cautious about spending. Right now, many are concerned that the housing collapse may spread to the nonresidential market. General contractors whose capacity is now stretched to the limit are tying to decide if they can work long days to get through the busy period or if they should spend to add design, equipment and skilled labor capacity. Designers know they will the first to fell the impact of the inevitable market slowdown. They are hiring reluctantly to meet current commitments but not expanding in advance of contracts. Materials suppliers are thinking about capacity expansions but the pause in sales growth in the last few months has them nervous about making new commitments.

Reed Construction Data believes that the problems in the housing market will have a barely measurable impact on job site activity in the nonresidential market in 2007. The impact will be larger in 2008 but not large enough to drop new starts below the expected 2007 level. The pipeline is full of projects financed and committed. Even the cities with the most serious housing surpluses will see a relatively small negative impact on the commercial and institutional markets. Florida experience a marked slowdown in new nonresidential projects in the first half of the year but that is now largely reversed.

Remember what is driving the boom in the nonresidential market. The need for additional capacity plays a key role and will continue to be a market driver as long as the economy keeps expanding. The slowdown in GDP growth from 3.5-4.0% to 2.5-3.0% will reduce but not eliminate the pressure to expand buildings and facilities. The other key market driver is the abundance of construction funds from foreign capital pouring into the US and much higher tax receipts and investment returns. This driver is also ebbing but will remain decidedly positive next year. Facility managers always believe they need more space but they only buy it when they have the cash.