August 4, 2010
Non-Residential Building Construction Recovery To Be Strongest In Northeast And California

Southern New England, New York, California, South Florida, Washington-Baltimore and four long depressed Midwestern cities will have strongest recovery for building construction, excluding single family housing, according to the May Expansion Index from Reed Construction Data. The index also suggests that the relatively hot housing markets in Texas recently will not cause a quick and strong recovery in Texas nonresidential construction.

The monthly expansion index is calculated from the Reed database of all construction projects in planning except single family housing. The index is the ratio of the value of building projects expected to start in the next twelve months to the value of building projects actually started in the previous twelve months. The list of approximately 25,000 projects in the planning phase is edited to include only projects far enough along in planning to be able to start within twelve months. Projects explicitly on hold or stalled at a pre-bid phase are excluded. Not all selected projects will start within twelve months.

The unweighted mean of the expansion index for all 360 metro areas is 1.94. This does not mean that starts will double in the next year. There is a substantial upward bias in the in index calculation process. However, this does not bias trends over time or comparisons between metro areas.

The accompanying table includes all metro areas with $500 Million or more starts in the last twelve months. The Expansion Index website has an interactive map with the index value for all metro areas.

The relatively high values in the Northeast and California partly reflect the difficulty of obtaining permits. Permits are obtained earlier and often move very slowly to the bid stage.

The low index values in the relatively strong housing markets in Texas and the Carolinas confirm, as commercial real estate sources show, considerable surplus space from previous overbuilding.

Note that some smaller metro areas, such as Rochester and Syracuse have a high index due to a small number of large projects. A large, once in a generation project, can push the expansion index in the smallest metro area to 20-50 which has a major impact for short period on local project costs. This appears to be the situation in the next year in Decatur AL, Holland MI and six other small cities.

Conversely, a relatively low index, suggests further declines in margins for local contractors and materials suppliers. Fifty cities have an expansion index under 0.50. Most are very small cities. But this list includes some midsize cities such as Harrisburg, New Haven, Youngstown, Colorado Springs, Lancaster, Scranton and Chattanooga.

The geographical distribution of construction investment looks a lot like the distribution before the housing boom. The high growth is on both coasts with slower growth in the interior of the country. Currently the high growth region includes many Midwestern manufacturing cities but this is not likely to persist long. Only three small Rocky Mountain cities are among the 150 cities with the highest expansion indexes. There are no Texas cities.

Source: Reed Construction Data, July 15, 2010

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