Declines Ahead for Commercial Construction

New York, NY, Jan. 12, 2009--Contractors, investors and developers are bracing for what could be the worst real estate crunch since the early 1990s, when the industry built a small city's worth of speculative office buildings that later went begging for tenants, according to a story in USA Today.

Commercial property sales plunged 73% last year, according to Real Capital Analytics. Vacancy rates are rising, and hundreds of large properties are in default.

The American Institute of Architects' billing index, a leading indicator of construction six months ahead, is at a record low. Unemployment in the construction industry is 15.3%, well above the average 7.2% jobless rate.

The 1990s crisis was sparked by federal tax breaks that encouraged overinvestment and overbuilding. This time around, the real estate frenzy was fueled by cheap credit, which allowed investors and developers to bid up prices of existing properties.

"This is a rolling problem that's only going to get worse," says Jeffrey DeBoer, president of the Real Estate Roundtable, estimating that about $400 billion worth of commercial real estate mortgages will come due by the end of 2009. Investors and developers might have trouble refinancing many loans, due to tight credit and falling rents and property values.

Robert Murray, vice president for economic affairs at McGraw-Hill, says the downturn will get worse in the coming year but may not end up being as dramatic as the 1980s and 1990s real estate implosion. The outlook depends on what happens to the overall economy.

Office construction peaked at about 218 million square feet of new space in 2007, compared with a high of 350 million square feet during some years in the 1980s. With the exception of retail, "I don't really think there was overbuilding to the extent of the late '80s and early '90s," Murray says. "In the case of retail, it was partly due to (shopping malls) springing up where new housing developments grew; also a movement to open-air shopping centers."

Murray expects commercial real estate construction, measured by square footage, to decline by 24% or more in 2009, after falling an estimated 24% in 2008. The retail segment, stores and shopping centers, which fell 33% in 2008, will decline another 29% in 2009.

Office space construction will plunge in 2009 by 26% — though Murray cautions that the office market is becoming increasingly vulnerable as unemployment rises. The hotel industry will move from a 3% dip in 2008, to a 30% drop in 2009.

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