US construction of properties for companies is growing faster than home building for the first time in five years, raising hopes that America?s businesses may help cushion the blow to the economy as the housing market slows.
Non-residential construction rose by 12.2 per cent year over year in April, outpacing 11.5 per cent growth of the building of single family homes ? a feat last achieved in April 2001.
The business property market, which includes offices, retail space and factories, appears to have warmed up after several years of weak growth, just as the red-hot housing market is starting to cool. ?The non-residential property market is coming out of the doldrums at exactly the right time,? said Patrick Newport, an economist at Global Insight, a consultancy.
?If this trend continues it should help take some of the sting out of a downturn in the housing market.?
Economists believe the emerging strength of the commercial property sector is unlikely to offset fully the pain from a slowing housing market. The market for corporate properties is less than half the size of residential housing, with spending of $335bn (?261bn, ?180bn) last year compared with $747bn in housing. And real estate spending by companies will do little to buoy American consumers in the way that rising house prices have.
Even so, forecasts by Global Insight suggest that rising activity in the commercial sector could offset half of the direct damage to growth from slowing home building in 2007, adding 0.25 percentage points to growth compared with a drag of 0.5 percentage points from housing.
Spending on commercial real estate has been contracting for most of the past five years, with a 17 per cent fall in 2002 alone in the aftermath of the September 11 terrorist attacks. Last year spending rose by just 2 per cent. But Global Insight is expecting a 7 per cent rise in spending this year and 8 per cent in 2007. Residential spending is expected to decline by 0.1 per cent this year and by 8 per cent next.
In addition to construction, there are other signs that companies are relaxing the purse-strings on property. Vacancy rates for office space have fallen from 15.3 per cent at the start of last year to 12.6 per cent. Rents for office space rose by 5.1 per cent last year, compared with just 1.4 per cent in the previous year. Meanwhile the amount of net new space used by companies rose by 22m square feet, compared with 7.5m.
The property markets for homes and for businesses tend not to move in lockstep. While the residential market is mainly driven by mortgage rates, the commercial market is led by employment growth. Over the past two years, the US economy has generated almost 4m net new jobs.
?There is a huge amount of pent-up demand from companies for new space,? said Lawrence Yuu, an economist at the National Association of Realtors. ?In the early stages of a recovery companies try to squeeze any extra workers into existing space and only when this creates strains do they consider expansion.?
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