Good News Forecast for Non-Residential Construction: Solid Growth Ahead
Posted by Rose Ann Woolpert on Mar 18, 2015
Despite slow construction spending in the first half of this year, commercial property occupancy prices and rates actually accelerated during the period. Since these are the primary indicators driving nonresidential construction capital expenditures, advisors believe this sector is in the early stages of recovery. Although commercial construction spending is up only 2% year to date, vacancy rates are low and average prices have increased. Office and lodging construction are other indicators of construction spending, and their recovery remains strong. Steady employment growth has been a key to these improvements.
Advisors expect “manufacturing construction spending to accelerate significantly over 2014-15 as healthy manufacturer returns and tightening capacity utilization amid rising industrial production spur investment in new facilities.” Additionally, “the impact of shale production on US cost competitiveness translates into a US chemical capital expenditure renaissance driving a significant tailwind to manufacturing construction in 2014-15.” Capacity utilization has tightened, industrial production is rising and capital expenditures are increasing.
Based on analysis of the past two decades, there does not seem to be a correlation between periods of rising interest rates and non-residential construction spending. In the past, steady interest rate increases did not derail construction recoveries. It appears that government interest rate policy is focused on moderating inflation. “While rising long-term rates has led to an increase in borrowing costs for long-term loans tied to real estate, such as residential mortgages or commercial real estate loans, we would note that rates on construction and development loans, which more directly impact construction activity growth, are based off short-term rates, which have remained flat at their lowest historical levels.”
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