S&P Report: Commercial Construction Facing Tougher Times

U.S. commercial construction surged 12.9 percent in 2007, responding to high occupancy rates and easy financing, according to a report from McGraw-Hill’s

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U.S. commercial construction surged 12.9 percent in 2007, responding to high occupancy rates and easy financing, according to a report from McGraw-Hill’s financial research and analysis division, Standard & Poor’s. U.S. Commercial Construction: After The Wave Comes The Trough reports that new activity dropped sharply in the fourth quarter, as financing became more difficult and employment growth slowed. S&P expects new commercial starts to weaken further in 2008, but the carry-through from buildings that reached groundbreaking in 2007 should keep construction spending above that of 2007.

All categories of commercial construction, plus multifamily housing, are likely to weaken, with apartments in the greatest danger and offices the least. On the positive side, the degree of overbuilding in commercial properties is far less than it was in the late 1980s, where downtown office vacancy rates were 20 percent, even before the start of the recession. At the end of 2007, vacancies were averaging about half that level; but, a recession reduces demand for office and retail space.

Overall, commercial construction starts (inflation adjusted) are expected to drop 16 percent in 2008 and 9.0 percent in 2009. However, a deeper recession would mean a worse decline. In S&P’s severe recession alternative, building drops 20 percent in both 2008 and 2009. The U.S. Commercial Construction report is available to subscribers of RatingsDirect at www.ratingsdirect.com. Nonsubscribers may purchase the report by calling 212/438-9823, or e-mailing research[email protected].