July 7, 2010
Commercial Starts Rise 10% In May

May construction starts rose 10.2% from April to the highest level in nearly a year. The monthly gain matches the usual seasonal rise in May so starts have been about stable for three months.

The preliminary May total includes residential starts estimated as the average of the last three months, pending hard data from the Census Bureau. A likely downward revision for residential will put May starts slightly below April. This is the expected cutback in starts for several months after the expiration of the homebuyer tax credit.

While the single-family market has weakened briefly, it is still expected to record the largest gain in starts through the end of 2011. Overall, starts are expected to stabilize during the summer, turn up in the fall and then rise progressively, but modestly, in 2011.

The May starts total is the net of a 52% month-to-month increase in commercial building starts, a 20% increase (i.e. the usual seasonal rise) in heavy construction starts and 3% to 4% drops (i.e. instead of the usual seasonal pick-up) in residential and institutional building starts. Heavy and institutional starts are consistent with their expected trends for the rest of 2010.

But the residential starts change in May is off trend due to the timing of the homebuyer tax credit. Large monthly gains are expected late in the year. This will be a single-family expansion with multi-family starts not expected to improve steadily until 2011. The huge monthly gain in commercial starts is likely random and reverses a large decline in March. A flat or slightly declining trend is expected until late in 2010.

Current commercial starts are heavily small buildings or renovation projects. Of the 52 $50 million or larger projects started in May, only two were developer-financed projects, both for $60 million.

The American Institute of Architects’ latest monthly survey of the level of design work shows that the long drop in design work has about ended. The commercial projects being designed will start late this year and in 2011 and will be completed and available for lease when rental rates are again rising.

Source: Reed Construction Data, June 24, 2010

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