Industrial construction spending growth stalls
By Daryl Delano -- Industrial Distribution, 10/1/1998
Industrial construction spending has been weak for the past couple of years, with no signs of letting up. Spending estimates compiled by the U.S. Commerce Department show that the total value of new industrial space completed during 1997 totaled just short of $31.4 billion. This was down about 3.9% from the current dollar value of new plant and warehouse space put-in-place during 1996.During 13 of the most recent 18 months for which data are available, spending has been trending below the construction spending values for the same months a year earlier. May 1998 industrial construction activity was at a $29.4 billion annualized rate, 3.7% below the May-1997 spending estimate.
Information from the Federal Reserve Board shows that total manufacturing sector production capacity grew by 4.7% between May 1997 and May of this year. Electric/gas utilities (+1.1%) and mining (+0.5%) operations have added to their capacity at a much slower rate than the manufacturing average. For the manufacturing sector, at least, there's reason to be concerned that this is too much new capacity for the slowing U.S. economy to absorb -- particularly in light of the evident overcapacity in competitive Asian markets.
Investment trends turned negative for both the buildings and equipment sectors during October-December of last year; the over-the-quarter decline in capital spending for new equipment was the first drop recorded for this long-booming component of business investment since the final quarter of 1991. And capital spending for new or renovated nonresidential buildings has declined in four of the past five quarters - most recently by 3% during the first three months of 1998.
Double-digit vacancy rates still exist in a growing number of markets, however. Metropolitan areas as diverse as Washington, Las Vegas, Atlanta, Dallas, and Orlando recorded vacancy rates in excess of 10% during the month of March. At the same time, exceptionally tight markets for manufacturing and warehouse space -evidenced by March 1998 vacancy rates of below 5% - existed in Detroit, Cincinnati, and Oklahoma City.
The increasing national vacancy rate for industrial space suggests that many markets are having difficulty absorbing the reduced amount of new space that is still coming on-line.
Consequently, we're currently forecasting that the total value of new industrial and warehouse space completed nationwide this year will be slightly below 1997's total, and that 1999 will, at best, hold at this disappointing level. Nevertheless, the dollar value of new construction (approximately $30 billion a year) still represents good, if selective, market opportunities for developers.
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