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Upswing in commercial construction seen for 2013

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Growth in 2012 signals a revival of the nonresidential construction industry.

Nationwide, the sector saw a 9.3 percent increase in revenues during the first half of 2012 compared to 2011, the U.S. Census reports. It was the first increase after three years of decline.

June and July, the latest information available, saw some construction slowdown, but the overall trend for 2012 is expected to be positive.

building under construction

Looking ahead into 2013, an overall growth rate of 6.2 percent for the entire nonresidential construction sector is predicted by the American Institute of Architects (AIA), which prepares a consensus forecast drawn from data provided by seven industry associations and economic analysts. The AIA’s forecasts are conservative – they predict that 2012’s final growth rate will be around 4 percent.

The nonresidential sector includes commercial, industrial and institutional building projects. Specifically, the 2013 forecast for commercial construction, comprised of offices, hotels, retail and other business buildings, is 10.2 percent growth, double the 2012 rate. Hotel construction is expected to jump a whopping 18.2 percent.

On the other hand, industrial construction isn’t predicted to do as well. In fact, the forecast is for 8.1 percent growth in 2013, down from an expected 12.9 percent growth during 2012.

Institutional construction – health, education, public safety, religious and amusement – is forecast to increase a modest 3 percent in 2013, but four times the .7 percent 2012 growth. Health, religious and amusement are the top categories here.

These expectations are especially good news in light of continued slow economic and job growth and the lack of a robust housing recovery – aspects of the economy that usually lead demand for new commercial facilities.
Because new construction has been so slow, the small amount of job growth means vacant buildings are being occupied at a higher rate than might be expected. Declining vacancy rates are being seen in office and industrial buildings. Retail is continuing to struggle and will do so until consumer spending fully rebounds.

An important element of the nonresidential market is foreign investment, accounting for more than 10 percent of dollars invested, according to Real Capital Analytics.

The recent extension of the EB-5 Regional Center Program until 2015 will provide a boost. The EB-5 program awards permanent resident visas to foreign investors who provide equity capital to U.S. companies, including real estate developers. The minimum investment is $500,000 in a high unemployment area; $1 million in other locations. Each year, 10,000 visas are awarded.

Despite the recession and the growth of emerging markets like China and South America, American real estate is still the top investment choice globally, according to the Association of Foreign Investors in Real Estate (AFIRE).

An AFIRE member survey found 60 percent of the respondents plan to increase their American investments in 2012, and these investments are regarded as the best opportunity for capital appreciation.

Top nonresidential international investments are, in order, industrial, office, retail and hotel. New York is the No. 1 city globally for investment. Nonresidential lending is also on the upswing. Troubled properties are making their way through the system as they are resolved through foreclosure, sale or restructuring. The default rate is also dropping steadily from the peak reached in 2010.

As a consequence, banks have been able to loosen credit slightly and originate more new loans. Capital access is crucial for construction projects to move forward, both on the equity and debt sides.

The recent Federal Reserve decision to buy $480 billion in mortgage-backed securities over the next year will likely benefit the commercial real estate market, says John O’Callahan, real estate analyst for CoStar Group.

The move is expected to lower commercial borrowing costs and make long-term investments more attractive. In particular, real estate investment trusts (REITs) are expected to benefit from lower costs.

Although building values have been stabilizing, the Federal Reserve initiative could boost equity further, creating wealth for investors. In turn, the rising benefits of real estate investment should spur additional building projects.

Issues to watch in 2013 include Congress’s handling of the national debt, expiring tax cuts, oil prices and the European economy.

Nationwide Vacancy Rates

Quarter Office Industrial Retail
4Q2010 16.4% 14.3% 13.0%
4Q2011 16.0% 13.5% 13.2%
3Q2012 15.5% 13.1% 12.9%
4Q2012 14.8% 11.3% 11.7%

Source: CBRE Econometrics Advisors