April gains awaken nonresidential construction
By Kim Kennedy -- Industrial Distribution, 8/1/1998
Construction spending for nonresidential buildings is expected to increase by 3.3% this year to a total of $229 billion. This year's gain is down from 7.6% in 1997 and as much as 11.5% in 1995-the peak year for nonresidential growth in this business cycle.In the first four months of the year, nonresidential (CII) construction spending was a meager 1.4% above its year-earlier level. But April's gain of 4.2% above April 1997 was largely responsible for even this weak performance. Through March, spending gains surpassed their 1997 level by just 0.4%. It now seems that nonresidential construction has passed through its weakest point in this cycle and is headed for stronger (not strong) gains in the months ahead.
The outlook for commercial construction is more positive than it was at the beginning of the year. The office market will continue to be the bellwether of this sector, but both the retail and hospitality sectors will perform better than expected. Overall, commercial construction spending will grow 4.2% in 1998 to $97.8 billion. To date (through April), commercial construction is 2.1% above a year ago. But a robust 9.9% increase in April has given hope that the market has finally turned the corner.
Office construction spending, buoyed by continued declines in vacancy rates and strong investor interest, will grow 9.8% this year to $35.2 billion. Year-to-date, office construction spending is 10.6% higher than in the same period of 1997. And April's 17.6% increase suggests that investors still see it as a hot market.
Retail construction is expected to gain 0.8% this year to reach $49.3 billion in spending. Through April, this market was down 3.1% below its 1997 level, but April's strong 4.9% increase is hoped to be a preview of further strength to come later this year.
From November 1997 through March 1998, hotel/motel construction spending had consistently declined from year-earlier levels. In April, however, the tables turned as spending gained 10% above its April 1997 level. We now expect hospitality construction to increase 2.8% this year to a total of $13.3 billion in spending.
Industrial construction will also see an increase in 1998 after two consecutive years of decline. Expect a 1.8% increase in 1998 to $31.2 billion. Although the market continued to be 0.3% below its 1997 value through April, healthy gains in both March and April suggest that this sector will inch ahead in 1998.
Institutional construction will increase 3% in 1998 to a total of $100 billion in spending. However, this year's growth will be much more moderate than the 11.3% gain in 1997. Spending gains thus far into 1998 are just 1.2% above 1997, and April's figures fell below their year-earlier levels. Nevertheless, we still believe that growth will prevail due to the strength in construction in private education and miscellaneous institutional buildings.
Healthcare, which was a boon to this sector in 1997, will be a drag on it in 1998. Expect healthcare construction spending to decline 2.5% in 1998 to a total of $18.4 billion. Private healthcare construction will fall 1.2%, and public healthcare construction will plummet 6.3%.
Education construction will grow 5.5% this year to $34.8 billion. The gains will be entirely on the private side: private education construction will increase 22.6%, while public education construction will take a temporary breather with a 0.3% decline. Other institutional construction (consisting of religious, miscellaneous private, and public administrative buildings) will grow 3.4% this year to $46.8 billion.
NONRESIDENTIAL CONSTRUCTION OUTLOOK
Billions of $ Annual % change
1997 1998 1999 1997 1998 1999
Total Nonresidential 221.7 229.0 99.6 8.3 4.2 1.8
Commercial 93.9 97.8 99.6 8.3 4.2 1.8
Office 32.1 35.2 38.6 16.1 9.8 9.7
Retail 48.9 49.3 47.7 3.2 0.8 -3.2
Hotel/Motel 13.0 13.3 13.3 10.2 2.8 -0.5
Industrial 30.7 31.2 30.8 -4.3 1.8 -1.4
Institutional 97.1 100.0 104.8 11.3 3.0 4.8
Healthcare 18.9 18.4 19.6 14.4 -2.5 6.1
Education 33.0 34.8 37.7 11.1 5.5 8.4
Other 45.2 46.8 47.5 10.1 3.4 1.6
Source: U.S. Commerce Dept. Forecast: Cahners Economics
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