Residential and Commercial Real Estate Headed in Different Directions

Written by: David Lereah   Fri, October 2, 2009 Beyond Today's News, Market Activity

A government report on construction spending in August underscored the divergence of residential and commercial real estate activity.

According to the Commerce Department’s construction report released Thursday, private residential construction spending rose by 4.7 percent in August from a month earlier, while private nonresidential construction fell by 0.1 percent and public construction fell by 1.1 percent. Total construction spending for August was up 0.8 percent from July but 11.6 percent below year ago levels.

The good news is that after a prolonged contraction, residential construction is finally going in the right direction and is expected to meaningfully contribute to GDP growth in the third quarter of this year. The bad news is that commercial construction is moving in the opposite direction.

Residential construction is climbing briskly as evidenced by a steady rebound in housing starts since the beginning of this year. Homebuilder confidence, as measured by the National Association of Homebuilders Housing Market Index has also steadily increased from the beginning of the year. Falling new home and existing home inventories, an $8,000 first-time buyer tax credit, and historically low mortgage rates are contributing to builder optimism and increased activity.

New residential construction spending rose 2.5 percent in August. is projecting a strong 20 percent annualized gain in real residential investment in the third quarter.

A downswing in commercial real estate can be attributed to an oversupply of commercial properties as well as tight credit conditions. In addition, a slumping economy, highlighted by a long run of large monthly job losses has seriously inhibited commercial construction activity.

Although the 0.1 percent drop in private nonresidential construction spending in August was relatively small, it followed substantial monthly declines in the prior two months. estimates that the decline in real nonresidential investment in the GDP accounts should be close to 15 percent in the third quarter. The economic forecasting company also expects the commercial real estate industry to continue its slump into early 2010.

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