Investment Notes

Total construction spending on an annual basis is expected to fall 12 percent this year and 4 percent in 2010, but spending in healthcare and infrastructure segments will increase, according to the Third Quarter U.S. Construction Briefing by IHS Global Insight’s Construction Service. Moreover, real total construction spending is expected to rebound with double-digit growth on an annual basis in 2011 and 2012, according to the IHS Global Insight forecast.

The mixed outlook for the construction market mirrors the mixed outlook for the broad economy. While the outlook for non-residential construction is weak for this year and next, residential construction—driven by a single-family market verging on recovery—is expected to expand in the second half of 2009, climbing 2.1 percent quarter-on-quarter in the third quarter and 4.8 percent in the fourth.

Non-residential construction remains in a slump, according to the forecast, pulled down by commercial construction, which faces a 27.9 percent annual decline this year. Occupancy rates in commercial properties, such as office buildings, hotels and retail stores, are falling and rents continue to drop. The combination of shrinking revenue and tight credit markets is acting as a roadblock to businesses seeking additional financing.

The pace of growth for manufacturing construction, pushed up by a surge in spending on pipelines and refineries, has slowed and, going forward, will likely plummet. On an annual basis, total spending for manufacturing construction is forecast to fall 41.5 percent in 2010 and another 12 percent in 2011 before recovering in 2012.

Meanwhile, total healthcare and infrastructure spending is expected to increase. In fact, construction spending for hospitals and other healthcare buildings continues to increase steadily, driven particularly by rapid expansion in public healthcare construction.

Infrastructure construction is forecast to rise 6.4 percent in 2010 and 4.5 percent in 2011. Most of the $82 billion in infrastructure investment (included in the $787 billion stimulus package) will be allocated over the next two years.

Spending on transportation infrastructure will see moderate increases in 2010. The stimulus package includes $13 billion for rail projects. However, transit systems in several major cities are facing deficits equal to at least 12 percent of their operating budgets. 

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