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CRE Finance World, Winter 2013

A Modest Outlook for Commercial Real Estate Chart 11 Chart 12 Credit Quality Is Approaching Bottom Construction Wages Begin to Increase Sources: Equifax, Moody’s Analytics Sources: Equifax, Moody’s Analytics Construction Conclusion The recovery of nonresidential construction, including CRE, has All major components of commercial real estate have at least reached generally been weak since the recession ended. Architectural a bottom for their cycles, and some are now improving. As the inquiries for all types of construction have been increasing since economic recovery gains traction later next year, demand for CRE the beginning of 2009, according to the American Institute of space will accelerate. Increased availability and quality of credit will Architects, but growth of billings for commercial and industrial also drive demand for space and new construction. However, as in architectural work has struggled to remain positive, reflecting the single-family residential real estate, the pace of CRE investments difficulty firms are encountering in attempting to transform inquiries over the next several years will be measured relative to previous into billed work. business cycle. Nevertheless there is improvement. Recent construction put in place Multifamily housing, bolstered by favorable demographics and for the combined major components of CRE — multiresidential, hotel, reduced rates of homeownership, has the brightest outlook among office, retail and manufacturing — is rising. After declining by more the major components of CRE. than $155 billion from 2008 through the end of 2009, a fall of more than 60%, total CRE related construction put in place has Demand for office real estate will improve as financial services risen by $43 billion, recovering more than a quarter of the value and other industries related to real estate that were hurt the most of construction put in place lost during the recession. by the housing crash expand once again. Growth of technology- producing industries and other professional services will also add Despite the increase in CRE-related construction, nonresidential to office space demand. construction employment has yet to begin a substantial recovery after shedding more than 20% of workers since 2008. The disconnect Demand for manufacturing CRE will undergo the most marked between rising nonresidential CRE-related construction put in evolution as high value and technology producers create demand place and much weaker growth in nonresidential construction for space to house new capital intensive production processes. employment can be partially explained by contractors using smaller work crews on construction projects amid tighter profit margins Retail faces the most sluggish recovery among the major CRE com- than during the earlier construction boom. With residential and ponents amid slow-to-improve consumer confidence and spending. nonresidential construction payroll employment still down by more than 2 million since the 2006 peak, construction wage rates have been About Moody’s Analytics Economic & Consumer Credit Analytics slow to rise, keeping wage costs low for CRE-related construction Moody’s Analytics helps capital markets and credit risk management professionals firms. However, as the pace of nonresidential construction has team of economists, Moody’s Analytics is a leading independent provider of data,worldwide respond to an evolving marketplace with confidence. Through its picked up, growth of aggregate construction wages has begun analysis, modeling and forecasts on national and regional economies, financial to outpace construction employment, implying rising costs for markets, and credit risk. For more from Moody’s Analytics visit www.economy.com. construction firms (see Chart 12). A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 59


CRE Finance World, Winter 2013
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