A hot construction market that lasted from mid-2003 to the early part of this year is cooling, causing construction supplies distributors nationwide to step back and assess their local markets for new business opportunities.

But the slowdown isn't cause for alarm. Jim Haughey, chief economist for Reed Construction Data in Waltham, Mass., says the stronger-than-average construction economy of the last few years is giving way to more moderate business conditions, and that the slowdown is part of a normal business cycle. The cooling conditions are felt first in housing, then in non-residential construction, and finally in civil projects, Haughey said.

The situation is causing distributors like Orco Construction Supply to shift their focus from residential to commercial business. Based in Livermore, Calif., Orco sells to the residential framing markets in California, Arizona and Nevada, but expects to do more business in condominium and retail construction over the next 18 months.

“[Home] builders have all this inventory and are only building if they have it sold—or they won't start building homes unless they think they can pre-sell them,” said Diane Chambers, Orco's regional sales manager for Southern California and Arizona. “There's just too much [housing] inventory sitting there.”

On the plus side, Chambers and her colleague Mike Young say commercial construction will be strong into 2008.

“[Commercial] should be relatively strong for the next 12 to 18 months,” said Young. “That will support this heavy residential that's been going up the past five years.”

The situation is similar on the East Coast, where Bronx, N.Y.-based Allen Kass is seeing growth in commercial projects in New York, New Jersey and Connecticut. Kass is president of Kass Industrial Supply , which supplies contractors that are building and remodeling office space throughout the region.

“The commercial side of the business is going like gangbusters,” said Kass, pointing to projects such as the World Trade Center, three local sports stadiums and large condominium complexes.

Despite the slowdown in the housing sector, year-to-date total construction starts rose 9 percent in August. Construction spending at the job site was essentially flat for the six months ended in August, but the increased starts suggest a modest pickup in spending ahead, Haughey said.

Though much of the increase in starts is due to construction cost inflation, the growth reflects strong activity in commercial sectors. Hotels, hospitals, educational facilities, retail buildings, highways and bridges continue to be the strongest growth markets, according to RCD. Hotel construction starts rose 102 percent through August 2006 compared to the same period last year, for example.

But there are declining markets on the commercial side as well. Manufacturing, warehouses, dams/marine, airports and miscellaneous non-building projects have all declined this year. Haughey says manufacturing construction starts were down 53 percent through August compared to the same period a year ago.

Regionally, Haughey broke out the value of construction starts by state, excluding residential projects. Through August, the five states with the highest increases in starts were Alaska, New Mexico, Arkansas, Oregon and Utah. In Alaska, the value of construction starts this year is up more than 120 percent over last year.

Though distributors won't feel the effects of that activity right away, it indicates the volume of business that may be on the horizon in the next year.

Mike Kangas, president and general manager of Alaska Industrial Hardware , based in Anchorage, says business is steady statewide. Alaska Industrial Hardware has eight locations throughout the state and serves retail, industrial and residential construction accounts.

As in the lower 48 states, Alaska's housing market has slowed and commercial construction is picking up, Kangas said. Big box retailers comprise much of the commercial work, as chains like Target and others announce plans to expand into the state.

“Everybody wants to be up here now,” Kangas said. “I think what happens is, as they expand in the lower 48 markets there's some saturation, so Alaska looks appealing.”

Kangas said Alaska Industrial Hardware's business is up this year, but mainly because of efforts to capture large industrial accounts—business in which they're bidding on large contracts to supply an increasing range of products.

“We're being more aggressive in obtaining bids and contracts,” said Kangas. “That's where the growth is.”

As for the coolest regions, Washington D.C., Nebraska, Hawaii, Indiana, and Wyoming have seen the largest drop in the value of construction starts this year.

In Connecticut, where housing starts were down slightly in August, business is slowing, but still growing, says Mike Marshall, owner of Mamsco Construction Supply in Branford, Conn.

“We've seen some crazy growth over the past few years,” said Marshall, noting that his company has averaged 25 percent growth per year recently. “This year, we're averaging 10 percent, which is not bad compared to some other distributors. All in all, we're not expanding as fast, but we're still seeing some pretty good growth this year.”