Economy Watch: Has Real Estate Development Stalled?

Construction spending, which development drives, is down. What's going on?

By Dees Stribling, Contributing Editor

U.S. construction spending didn’t increase much in June, according to the Census Bureau on Tuesday—up 0.1 percent altogether, 0.4 percent for residential construction and absolutely flat (0.0 percent) for non-residential construction spending, all when compared with May. That’s the weakest aggregate increase since January. Most property and project categories either gained a little or actually dropped for the month. Spending on office projects, for instance, lost 1.1 percent, and spending on healthcare, communications and manufacturing projects likewise lost ground for the month. A few categories were up, however, such as total residential (up 0.4 percent) and lodging (up 3.9 percent). Does it mean development—which drives construction spending—has hit some kind of bump across the property spectrum?

More likely it’s monthly noise. Seldom have monthly ups and downs meant much in the long run, or even the mid-term. More important numbers in the Census Bureau construction spending report are year-over-year figures, and some of those are very robust indeed. Spending on manufacturing projects, for example, increased a whopping 62.1 percent in June compared with June 2014. Monthly growth might have slipped, but companies who make things domestically are clearly building for long term, which assumes considerable expansion for the much-disparaged manufacturing sector.

A number of facts support that outlook and offer property owners a chance to capitalize on the expansion. For instance, manufacturers in the United States are the most productive in the world, far surpassing the worker productivity of any other major manufacturing economy; manufacturers in the United States perform more than three-quarters of all private-sector R&D in the nation; and taken alone, U.S. manufacturing would be the ninth-largest economy in the world (all of these are based on Bureau of Economic Analysis data).

Other sectors doing very well in terms of construction spending growth since last year include lodging and office, up 42.2 percent and 24.4 percent, respectively. Both of those sectors, lodging especially, are responding to renewed demand for those kinds of space. The U.S. hotel industry, after all, is having one of its best periods every (if not the best), and in some U.S. metro markets (Seattle, Denver), even spec office projects are beginning to take shape. On the residential side, construction spending is up 13 percent for the year, roughly split between single-family and multifamily. Only two categories of construction spending dropped year-over-year in June: public safety, down 3.1 percent, and—not surprisingly—power, which includes oil and gas, down 16.5 percent.

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