A new forecast of the construction industry in the January 2001 issue of i>Buildings magazine reports that real estate will remain overall the strongest sector of the US economy as the high-tech sector continues to level out after unprecedented growth during the last few years. The forecast also reports that real estate square-footage totals are expected to slip 12% in 2001 as a result of slower economic growth, tighter bank lending, and uncertainty surrounding the new presidential administration and evenly split Congress. Total nonresidential square-footage is estimated to be about 1.78 billion square feet in the next year, while 2001 contract value for all nonresidential construction is expected to rise 2%, reaching an estimated $173.2 billion.
The article points out several factors that indicate a positive forecast: Vacancy rates for all the major property types sit comfortably under 10%; hotel occupancy has slipped, but the break-even rate has fallen faster; real estate isn’t overpriced compared to other assets (yield expectations stand 562 basis points above ten-year Treasuries); rents continue to show steady growth; and construction is still under control, especially in Offices.
Forecasts were determined using a survey sent to Buildings’ 57,000 readers, who consist primarily of major building owners and FM decision-makers. Results were broken down according to building types. For the complete forecast, visit Buildings magazine online.
Office facilities vacancy rates are continuing to decline to about 9% nationwide. The private equity return of these facilities was running at 14% twice the twenty-year rate of 7%. Also, the downtown share of US office completions has been below its thirty-year average since the early 1990s, and the average size of new downtown office buildings for the past seven years has been below the sizes commonly seen in the 1980s. In an economic environment with a somewhat slower pace of employment growth, economists predict office construction will respond to the dampened demand for space by decreasing 4% to 260 million square feet.
Retail facilities expect to see the influx of smaller, urban infill projects that will offer the most investment return potential, while big box retail slows down. Also, analysts expect online retail businesses such as Amazon.com to build stores in the near future to compete with other “clicks-and-mortar” businesses like Barnes and Noble.
Education facilities are expected to get a boost from rising student enrollments. Secondary and higher education enrollments are both expected to increase over the next ten years. In addition, the average US school building is forty years old. Last June, a report of the nation’s schools found that a majority of schools need to spend money on repair, renovation, and modernization to bring buildings into “good overall condition,” an estimated cost of $127 billion.
Health facilities are still reeling from the financial stress created by provisions of the 1997 Balanced Budget Act. As a result, construction in this sector dropped back 8% in 2000. Although Congress has been working to ease these cuts since 1999, analysts don’t expect the sector to fully recover anytime soon.
Hospitality facilities, which dropped 8% in 2000, will likely decline another 8% in 2001 with much of the retreat still focused on the low-end segment, say forecasters. Contract values are predicted to drop about 4%.
Warehouse and corporate service facilities are expected to experience a substantial increase in new construction spending and a moderate increase in modernization activity.
Industrial facilities are experiencing low vacancy rates, with the national vacancy rate at 6.5%. Vacancy rates in active port areas driven by the import market, such as Seattle and Oakland, are even lower. Northern New Jersey has the strongest vacancy rate: 2.5%.
