Strong construction spending pushes up GDP; multifamily builders remain optimistic
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Gross domestic product, net of inflation (real GDP), grew 3.7% in the second quarter of 2015 (2Q15) at a seasonally adjusted annual rate, rather than the initially estimated 2.3%, the Bureau of Economic Analysis reported on Thursday. Reuters reported, "Investment in nonresidential structures was revised to show it rising at a 3.1% rate, reflecting stronger spending on commercial and healthcare construction. It was previously reported to have contracted at a 1.6% pace. Spending on residential construction was raised to a 7.8% pace from a 6.6% rate."
The National Association of Home Builders (NAHB) reported on Thursday that its "Multifamily Production Index (MPI) edged up one point to 55 in the second quarter, marking the 14th consecutive quarter that the index has been 50 or above. The MPI measures builder and developer sentiment on a scale of 0 to 100, where any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse. Historically, the MPI has performed well as a leading indicator of the Census Bureau's measure of multifamily starts. The MPI is a weighted average of three components that measure industry sentiment about construction of low-rent apartments, market-rate rental apartments, and 'for-sale' apartments or condominiums. In the second quarter, the MPI component tracking low-rent units stayed steady at 54, while market-rate rental units increased one point to 60 and for-sale units rose three points to 53."
Occupancy and rental or room rates increased for all five income-producing types, real-estate analyst Dividend Capital Research reported on Tuesday in its quarterly Cycle Monitor analyzing conditions in more than 50 metro areas. Repeated increases are a positive indicator for future construction. Office occupancy rose 0.2% in 2Q15 and was up 0.6% year-over-year. "More than 16 million square feet were absorbed in 2Q15 with only 8.9 million of new completions nationally. Top market improvements were Dallas and Nashville, while markets with negative absorption included Houston and Washington, D.C. New construction is now at about 70% of the pre-recession peak. Absorption continues to be slow with the low square feet per employee ratio as the new norm when hiring millennials." Industrial occupancies increased 0.1% in 2Q15 and 0.6% year-over-year. "New construction continues at reasonable levels that are well below previous cycle peaks in most markets." The national apartment occupancy average rose 0.4% in 2Q15 and 0.2% year-over-year. "Many markets reversed their previous trend and moved back up to their peak occupancy levels." Retail occupancies were up 0.1% in 2Q15 and 0.4% year-over-year. "Malls and grocery-anchored centers continue to outperform other retail venues. Restaurants and brew pubs have created strong space demand in cities that millennials prefer to live in." Hotel occupancies increased an average of 0.3% in 2Q15 and 2.1% year-over-year. "The strong economy has continued to support room demand, but a new technology development [exemplified by Airbnb.com] is threatening traditional hotel demand."
Consultant IHS and the Procurement Executives Group (PEG) reported on Tuesday that "construction costs fell again in August....The headline current IHS PEG Index (ECCI) registered 45.7 this month, down from 48.8 in July and well below the neutral mark [in which a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength]. The headline index has not indicated rising costs since December. The current materials/equipment index slipped to 44.2, down from 47.4 in July. The pricing environment appears to be deteriorating with the current materials/equipment index registering its lowest reading since March of this year. The underlying detail shows falling prices for nine of the 12 individual components tracked by the survey. Prices for steel products, however, showed particular weakness with the indexes for fabricated structural steel, carbon steel pipe, and shell and tube heat exchangers all indicating that prices are falling and that price declines have become more widespread....Pumps and compressors and turbines registered no price change. Ready-mix concrete was the only material index to register price gains in August and has been the strongest index over the year. The current subcontractor labor index registered 49.1 in August, moving the index back below the neutral mark."
The National Highway Construction Cost Index, a measure of the cost of all projects awarded by states, increased 1.6% in March from December 2014 and 3.5% from March 2014, according to data the Federal Highway Administration posted. The index has fluctuated within a narrow range since late 2011.
"The average length of time to complete construction of a multifamily building, after obtaining authorization, was 11.7 months according to the 2014 Survey of Construction (SOC) from the Census Bureau," NAHB reported on Wednesday. "The permit-to-completion time increased by approximately one month from 2013 to 2014, as per unit median square footage and the share of multifamily buildings with 20+ units rose. The average time to build multifamily housing varies with the number of units in the building. In 2014, buildings with 20 or more units took 14.9 months to complete from the time of obtaining permits, whereas properties with 10 to 19 units typically finished in 13.6 months, and 5 to 9 unit buildings came in at 11.5 months. Lastly, 2 to 4 unit buildings required only 11.4 months. The average time from permits to start, however, does not follow the same pattern with respect to property size. Properties with 10 to 19 units had the longest average waiting period, 2 months, in 2014, compared to 0.9 months, the shortest one, for buildings with 5 to 9 units."
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