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Will the Commercial Market Step Up the Pace or Be Out of Step?

— by Kenneth D. Simonson

The economy is marching into 2004 at double-time. After growing at a blistering 8% annual rate in the third quarter of 2003, inflation-adjusted gross domestic product (real GDP) appears poised to keep rising at a brisk 3% to 5% rate in each quarter of 2004. But nonresidential construction will not be in step, because the factors that influence commercial construction are so disparate.

Strong growth in real GDP means that employment should finally increase, and consumers will have more to spend. That will bolster construction of retail, consumer service, and leisure-related facilities. In addition, rising health care expenditures will generate more construction of hospitals, doctors’ offices, clinics, research and testing facilities, and even drugstores.

Unfortunately, other nonresidential construction sectors will have to wait a while longer to join the parade. For instance, record high vacancies rates in many office markets will keep office construction depressed until 2005. Similarly, the depressed occupancy rates of most business hotels mean this category, along with business convention and travel facilities, will have to wait another year or more for an upturn.

Although manufacturing output is rising, many industries have sent production abroad for good. Other producers will be able to meet rising demand by re-opening shuttered facilities or retooling within existing walls. Therefore, there will be little demand for new factory construction for several more quarters.

Electric power plant construction was hot until 2002, when cancellations and shutdowns overtook new starts. Unless the economic recovery remains exceptionally strong, the glut of power plants will keep construction in this sector at a minimum for at least two more years.

The rising economy will not show up in higher state tax receipts until budgets are set for the coming year. Thus, many legislatures and local governments will have to trim construction on public universities, offices, and public safety and correctional facilities.

Elementary and secondary school construction will benefit from the strong housing market. A strong housing market creates demand for schools near the new homes, and the wherewithal to pay for them in school districts that rely on rising property values for their funding.

Construction was in front of the economic parade during 2001 and 2002. In 2004 the industry will be marching in different directions. Hopefully it can get back in step by 2005.

Kenneth Simonson is the chief economist of the Associated General Contractors of America (AGC), Alexandria, VA.He can be reached at 703/837-5313 or [email protected].

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