The put-in-place commercial construction market increased 10 percent to almost $83.1 billion in 2007. It will increase another 2 percent in 2008 to more than $84.7 billion and is predicted to reach $98.9 billion in 2011. Moving forward into 2008, there will continue to be a connection, although not as strong, between the commercial market and residential building activity. However, this residential downturn has occurred without a national recession, so the link is lessened.

The residential market is typically a leading indicator of commercial construction activity with a one- to two-year lead time. Residential construction was stagnant in 2006 and dropped 18 percent in 2007. It will slightly influence commercial activity in 2008. Expect put-in-place commercial construction to grow 2 percent in 2008, compared to a 10 percent increase in 2007.

The commercial construction market includes buildings and structures used by retail, wholesale and selected service industries. Multi-retail is the largest of the subsegments at 40 percent of total commercial construction, followed by warehouses (that are not on manufacturing sites) at 20 percent. Other commercial includes drug stores, building supply stores and other stores such as furniture and electronic stores, veterinary clinics and post offices.

Within the multi-retail subsegment, there has been a shift in preferred building types. Open-air centers have experienced above-average growth in 2007 and have replaced the construction of regional enclosed malls. These centers, also known as lifestyle centers, typically have lower occupancy costs than regional malls – nearly $35 less per square foot. In addition, enclosed malls have suffered from declining traffic, loss of tenants and increased competition.

According to the National Retail Federation, the expansion of department and big-box stores will also contribute to future commercial growth. Retail giants such as J.C. Penney, Kohl’s and Target plan to open a combined 3,500 stores by 2011.

Economic Indicators
To predict put-in-place construction spending in the commercial segment, several key economic indicators must be considered. The main economic indicators that influence the commercial market are construction employment, industrial production, population, productivity, corporate profits and government consumption. The t-tests for all of the indicators are above 2.05, making them statistically significant in predicting the commercial market. Other important indicators for commercial include the consumer confidence index (CCI), retail sales, the consumer price index (CPI) and personal consumption expenditures (PCE).

The consumer confidence index is viewed as a leading indicator for consumer spending, which drives two-thirds of the U.S. economy. However, recently, decreasing consumer confidence has not yet translated into a decrease in consumer spending. The conference board’s consumer confidence index, which has been declining since the summer, fell further in November. The index is now 87.3, down from 95.2 in October. The expectations index fell to 68.7 from 80.0. The present situation index decreased to 115.4 from 118.0.

“This month’s deterioration in confidence was due primarily to the sharp decline in the expectations index,” says Lynn Franco, director of the Conference Board Consumer Research Center. “Consumers’ apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter. In fact, consumers’ inflation expectations have surpassed the spike experienced this spring and a larger percentage than last month expect stock prices to decline. The present situation index still suggests the economy is expanding, albeit slowly. Despite this rather bleak outlook, consumers [are expected to spend] more on gifts this season than they did last Christmas.”

Commercial Construction Drivers
Retail sales provide the first solid indication of the strength or weakness in consumer spending. It contains data on the purchase of goods only, not services. The amount of goods sold drives commercial construction. The advance monthly retail sales report for October estimates that retail and foodservice sales were $380.3 billion. This is an increase of 0.2 percent from the previous month, and a 5.2 percent increase from October 2006. Total sales for August through October 2007 were up 4.5 percent from the same period a year ago, and the August to October 2007 percent change was revised from 0.6 percent to 0.7 percent increase.

Total retail and foodservice sales excluding motor vehicles and parts dealers were up 0.2 percent over the month and were up 5.2 percent from a year ago. Motor vehicle and parts dealers’ sales were up 0.2 percent from September and up 5.0 percent from October 2006. Building material and garden equipment and supplies dealers’ sales were up 0.6 percent over the month and up 1.3 percent from a year ago. Gasoline station sales were up 0.8 percent from September and were up 16.3 percent from October 2006. General merchandise store sales were down over the month and up from a year ago, while department store sales (a component of general merchandise) were down over the month and a year ago. Nonstore retailers’ sales were down over the month, but up from a year ago, as food and beverage service sales were up for the month and a year ago.  

Consumer Price Index
CPI is the most widely used measure of inflation. As inflation increases, less can be purchased with the same amount of money. Consumers tend to decrease their purchases when they feel that inflation is on the rise. On a seasonally adjusted basis, the CPI increased 0.3 percent in October, the same as in September. Energy costs rose 1.4 percent in October. Within energy, the index for petroleum-based energy increased 1.5 percent, while the index for energy services rose 1.3 percent. The food index rose 0.3 percent in October. The index for all items less food and energy – core CPI – increased 0.2 percent in October, the same since June.

For the first 10 months of 2007, the CPI rose at a 3.6 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. Energy costs, which rose 2.9 percent in all of 2006, advanced at a 12.3 percent annual rate in the first 10 months of 2007.

The index for housing increased 0.2 percent in October, following a 0.3 percent increase in September. The index for household energy increased 1.4 percent. Each of the three major household fuels increased with a 0.7 percent increase in the index for natural gas, 2.3 percent in the index for fuel oil and 1.5 percent in the index for electricity.

PCE, or consumer spending, drives two-thirds of our economy. Consumers have remained resilient and continue to contribute to GDP growth. PCE increased $23.8 billion (0.2 percent) in October. This follows an increase of $33.0 billion (0.3 percent) in September. In October, PCE for durable goods decreased 0.5 percent, and it increased 0.3 percent for nondurable goods and increased 0.4 percent for services.

The commercial put-in-place construction segment is expected to continue growing, but at a slower rate. This increase will continue due to a weaker connection to housing and resilient consumer spending. The retail sales and personal consumption expenditures indicators support this continued growth. While consumer confidence has been dropping, it has not caused consumers to stop spending.