Nonresidential Building Poised for Modest Uptick

NEW YORK CITY—Outside the multifamily sector, commercial construction's growth rate is a bit more modest. However, it's leading the way when both private- and public-sector nonresidential construction are factored in, says Fitch Ratings. 

Private nonresidential construction spending increased 12.9% to $187.5 billion during the first seven months of 2014 after gaining just 1.2% in 2013. After four consecutive full years of decline, public-sector spending is once again trending downward thus far this year, slipping 0.1% between January 1 and July 31.

“Continued improvement in commercial real estate fundamentals and a slight easing in bank credit lending standards will likely drive higher commercial construction activity further,” says Fitch director Robert Rulla. The ratings agency projects that private nonresidential construction spending, including office and logistics, will grow 8% in '14 and 6% in 2015. 

In line with recent trends, Fitch expects public construction spending will remain relatively weak into next year, although street and highway spending will advance at a faster pace. This aspect of public-sector construction bucked the declining trend and grew 0.9% in '13 and is up 3.1% year to date.

“Congress recently extended the current highway bill to May 31, 2015, which provides some certainty for funding in the short-term,” according to Fitch. President Obama signed the Highway and Transportation Funding Act of 2014 into law last month. Nonetheless, Fitch says, “the industry needs a long-term highway bill with guaranteed funding to encourage state and local governments to undertake long-term highway projects.”

Furthermore, state and local governments have begun taking a more active role in seeking revenue sources to fund infrastructure spending. Fitch projects public construction spending will increase 1% in '14 and 3% in '15.

Financing numbers, too, point to the increases. “According to the latest Flow of Funds Report from the Federal Reserve, total commercial mortgages increased 3.4% during the first quarter of '14 compared with the first quarter of '13,” according to Fitch's “Measuring Wheel” report. Total commercial mortgages grew 0.3% on a sequential basis compared with Q4 '13.

Citing figures from the Mortgage Bankers Association, Fitch notes there was a 1% overall decrease in commercial/multifamily lending volume during Q1 of this year compared to the same period last year. The decline was driven by the decrease in originations for retail and multifamily properties, which fell 19% (on a dollar volume) and 17%, respectively. Originations grew 10% for healthcare properties, 15% for office properties, 44% for hotel property loans and 52% for industrial properties.

“According to the MBA, the dollar volume of loans originated for commercial bank portfolios grew 55% while life insurance company loans increased 18%,” says Fitch. MBA's report indicated that conduits for CMBS fell 21% from last year's first quarter, while GSE loans declined 55% year-over-year.

The CMBS market regained some ground during 2011, 2012 and '13 but has slowed slightly this year,” according to Fitch. The CRE Finance Council's Compendium of Statistics showed that CMBS issuances grew 172% during '11 to $30 billion from $11 billion in 2010.

“CMBS issuances gained a further 48.2% in '12 to $44.4 billion and advanced 80.7% to $80.3 billion during '13,” says Fitch. “Despite the strong increase in activity during the past few years, CMBS issuances remain well below the peak issuance of $230 billion during 2007. Through the first half of '14, total CMBS issuances were $39.3 billion, 5% below the levels recorded during the first half of '13. “