Commercial Sector Expected to Lead Real Estate Recovery

Despite the lingering effects of an over-built housing market, the continued difficulty to obtain financing for real estate projects, budget shortfalls at state and municipal governments, and the anxiety surrounding the prolonged European debt crisis, there are signs that the U.S. design and construction industry will be improving. Corporate profits have returned to pre-recession levels, and businesses have subsequently been increasing their capital spending.

Borrowing costs are at record low levels, and pent up demand for commercial and retail projects factors into what projects to be a 2.1% rise in spending this year for nonresidential construction projects. The American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, also projects a 6.4% increase of spending in 2013.

“Spending on hotels, industrial plants, and commercial properties is going to set the pace for the construction industry over the next two years,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “The institutional market won’t experience the same growth, but healthcare facilities and places of worship are poised for a positive economic outlook in that sector.”

Market Segment Consensus Growth Forecasts: 2012 vs. 2013
Overall nonresidential: 2.1% (2012); 6.4% (2013)
Commercial/industrial: 5.6% (2012); 11.4% (2013)
Hotels: 10.2% (2012); 19.7% (2013)
Industrial: 6.0% (2012); 10.2% (2013)
Retail: 5.0% (2012); 9.9% (2013)
Office buildings: 4.3% (2012); 9.6% (2013)

Institutional: -0.1% (2012); 3.6% (2013)
Religious: 5.1% (2012); 6.3% (2013)
Healthcare facilities: 4.5% (2012); 5.3% (2013)
Amusement/recreation: 0.2% (2012); 6.5% (2013)
Education: -1.7% (2012); 3.1% (2013)
Public safety: -3.8% (2012); 0.3% (2013)

Remarking on what could derail a positive turnaround, Baker added, “We are concerned that the unusually high energy costs, given the overall weakness in the economy, might trigger a jolt in inflation and hamstring economic recovery. The housing market also needs prices to stabilize and to resolve the high number of delinquencies and foreclosures before it can fully recover.”