High non-res states

Ten states account for 52 percent of non-residential building construction starts this year through September, according to Reed Construction Data. Starts are up 18 percent in these states from a year ago, about the same as the 17 percent gain for the U.S. as a whole. What happens on job sites in these states will determine whether the non-residential building boom continues, pauses at a high level or reverses. Both the current market situation and outlook vary significantly among the 10 states.

California
Building activity has increased more than 50 percent so far this year in California in spite of a subpar economic environment, according to almost every significant measure. Part of the surge is renewed public spending after a cash crisis forced drastic cuts a few years ago. Part of the surge is also to accommodate servicing the soaring trade with Asia, which requires a high ratio of space to jobs. The current high growth rate is unsustainable, but will persist into 2008. The weak economic environment will take its toll within a year. Note that California is becoming more like New York and Massachusetts and less like Florida and Texas. New space for more people is now less significant. Improved space for wealthier people is now more significant.

Texas
All of the economic environment measures in Texas are among the strongest in the U.S. Therefore, the surge in non-residential construction activity will strengthen before it begins to ebb in 2009 or later. Texas is the new California or Florida. Low costs are attracting new jobs and workers. Development follows quickly because permitting is relatively quick and inexpensive. Oil and natural gas royalties have pushed state budget reserves to five-times-higher than the rest of the country. This provides funds for expanded public building. The Texas boom is heavily dependent on foreign immigration, much of it illegal, and is at risk to tougher border enforcement. The Texas boom has not spilled into Arkansas or into Oklahoma, but it has spilled into New Mexico, where non-residential construction starts in the last three months are 74 percent higher than a year ago.

Florida
Non-residential construction spending is growing twice as fast in Florida as in the rest of the country in spite of a construction economic environment that has faded to about average-plus. High costs and hurricanes have reduced Florida’s population growth. Also, the largest decline in housing starts in the country is further dampening population immigration and economic growth. Public construction is being supported by a high state budget reserve, but the recent drop in state tax collections is a threat to spending a year ahead. The non-residential building boom is being boosted by the development of destination sites, as in Las Vegas. Money earned anywhere in the world funds this development.

New York
New York construction activity is still being boosted by 9/11 replacement projects. However, also note that New York has had no decline in housing permits, which means no fall-off in the need for neighborhood services space. The construction economic environment in New York is about average with out-migration the only significant negative. Credit the strong market in New York to the booming investment industry. Bonuses paid in the industry are maintaining homebuilding. Investment industry profits are driving the demand for improved non-residential space. This momentum will be considerably less in 2008.

Illinois
The economic environment for construction in Illinois is slightly subpar, but better than in the rest of the industrial Midwest. Credit this to Illinois’ diversified economy — agriculture, machinery, finance and business services. Non-residential construction starts have only increased enough this year to cover rising project costs. Expect a modest amount of real growth over the next year.

Georgia
The economic environment for construction is clearly above average in Georgia, but non-residential construction activity is declining. The housing collapse has hit Atlanta relatively harder than the rest of the U.S. But overbuilding in the past is the primary reason for the recent weakness in construction. Developers were tardy in adjusting to Georgia’s slowing job and population growth rates as the state became expensive relative to Tennessee and South Carolina. Serious water supply problems have the potential to slow development further.

Ohio
This year’s building boom in Ohio is happening in an economy with no increase in jobs and continuing out-migration. Some of the new space is catch up, some is a deliberate attempt at economic pump priming and some is activity attracted from now-more-expensive neighboring states. The boom is not sustainable, although it may last well into 2008.

Pennsylvania
The economic environment for construction in Pennsylvania is subpar, but has so far had only a modest impact on non-residential building starts. More declines are ahead. The state is picking up economic activity in the east from more expensive New Jersey and New York, but losing economic activity in the west to less expensive Ohio.

Indiana
The economic environment for construction is subpar in Indiana. Therefore, the 13.8 percent drop in non-residential building starts so far in 2007 is consistent with economic conditions. That Indiana is on the list of the ten largest states at all is because of a strong farm and industrial economy in 2004 to 2006.

North Carolina
The economic environment for construction is well above average in North Carolina, but this has not yet been reflected in non-residential building starts, which are down 9.1 percent so far this year. The outlook is for rising starts soon. Your comment?