Spending on office, hotel, retail and other commercial real estate projects provided a strong lift during an otherwise flat September for U.S. construction spending, according to the latest government figures.
Overall nonresidential construction spending slipped a seasonally adjusted 1% to a preliminary $596 billion in September from the previous month, but still managed to increase 4.2% on a year-over-year basis, according to the Nov. 3 release from the U.S. Census Bureau on the value of U.S. construction put in place.
Hotel contruction led the pace in September, with a 4.7% increase from the previous month and a 14.7% increase year-over-year. Office construction spending grew 2.4% in September and is up 15.7% from the same time a year ago, while spending on commercial construction — retail, wholesale and selected service projects — gained 1.3% for the month and has grown 12.3% on an annual basis, according to the Census Bureau.
A few CRE-related sector slipped or remained flat in September, including manufacturing (-1.3%) and health care (-0.9%). While health care construction spending is also down 7.5% from a year ago, the manufacturing sector — driven by an uptick in manufacturing and logistics facilities, has rebounded a strong 16.4% since September 2013.
New private multifamily projects, which have led all construction spending gains at 25.7% year over year, slipped 1% in September.
Rising Construction Levels Attract REIT Exec Notice
With construction rebounding or having recovered in virtually every major commercial real estate property type, it’s no surprise that development pipelines have been a major topic of discussion at this week’s REITWorld conference sponsored by NAREIT and held this year in Atlanta, a market where commercial construction is finally bouncing back after a long hiatus.
“Buildings are trading above replacement costs, and we’re building brand-new building in the CBDs of each of these markets for lower costs per square foot and higher yields than where existing buildings are trading,” said Owen Thomas, CEO of Boston Properties (NYSE: BXP), which is developing major office projects in each of its four core markets; Boston, Washington, D.C., New York City and San Francisco.
“The yield that we’re delivering the buildings at is significant, somewhere around 7%, and cap rates are in the high 3’s to 4.5%,” Thomas told the lunch crowd during a panel discussion with fellow REIT CEOs. “That’s a very attractive spread and leads us to want to be developers.”
Redevelopment is a central growth driver for mall and shopping center owner General Growth Properties (NYSE: GGP), chiefly expansion of existing properties and acquisition of urban retail centers, said CEO Sandeep Mathrani.
“We’ve redeployed over $2 billion in redevelopment, and that gives us very healthy yields of 8% to 10% unlevered — old fashioned, cash on costs,” Mathrani said.
Despite the flat September performance, third-quarter total nonresidential fixed investment grew 5.5% after expanding 9.7% in the second quarter, according to the gross domestic product (GDP) report by the Bureau of Economic Analysis released by the government last week.
While the U.S. economy has been hard pressed to record two consecutive good quarters since the recovery began in mid-2009, “Improving confidence among consumers, business owners and real estate developers, among others, suggests that additional momentum is likely,” Associated Builders and Contractors (ABC) Chief Economist Anirban Basu said.
A number of leading indicators, including the Consumer Confidence Index, which attained a seven-year high in October; and the Architecture Billings Index, which rose to a strong 55.5 in September from 53 in August; imply that nonresidential spending should continue to recover, with privately financed projects continuing to drive growth, Basu said.
“With national job creation accelerating recently and interest rates remaining ultra-low, one would expect private construction to perform well during the quarters ahead, while growth in publicly funded spending will be much softer,” Basu said.
“The industry should be further buoyed by the economy’s two consecutive quarters of respectable economic growth, something the U.S. economy has rarely achieved during the current recovery.”
