Page 31 - BusinessWest August 19, 2024

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Outlook
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banks reported tightening standards for all types of CRE loans. Meanwhile, a mod- erate net share of banks reported weaker demand for construction and land devel- opment loans, while significant net shares of banks reported weaker demand for loans secured by non-farm, non-residential, and multi-family residential properties. The most cited reasons for tightening credit policies on CRE loans were less favor- able or more uncertain outlooks for CRE market rents, vacancy rates, and property prices. Additionally, major net shares of other banks cited a reduced tolerance for risk, increased concerns about the effects of regulatory changes or supervisory actions, and a less favorable or more uncertain outlook for delinquency rates on mortgages backed by CRE properties.”
A tighter financing environment coupled with weaker demand for most catego- ries of commercial properties continues to put downward pressure on property values. MSCI’s Commercial Property Price Index indicates a 13.5% overall decline in commercial property values since its most recent
high in mid-year 2022.
Offices have seen the steepest decline of over 26% over this period, while apartment values have declined by 21%. Retail facilities have seen a more modest decline of 10%, while industrial property values have continued to increase, tacking on about 5% in value gains over this period. Price declines for apartments and retail facilities are beginning to mod- erate, but continue to fall quite sharply for offices, particularly in downtown areas.
Architecture firm revenue is a very accurate lead- ing indicator of construction spending with a nine- to 12-month lead. Quarterly billings at architecture firms have been declining since the fourth quarter of 2022, according to the AIA/Deltek Architecture Bill- ings Index. However, the pace of decline — though volatile— has begun to accelerate over the past 10 months.
“A tighter financing environment coupled with weaker demand for most categories
of commercial properties continues to put downward pressure on property values.”
Firms that specialize in the multi-family residen-
tial market have seen the steepest downturn in billings, followed by those special- izing in commercial/industrial activity. Firms with an institutional specialization have generally seen revenue levels hold steady, although there has been emerging weakness in recent months.
Given that both new design contracts and project inquiries at architecture firms have been about as weak as billings, prospects for a turnaround in design activity do not appear to be imminent.
Institutional Sectors Offer Bright Spots
Outside of a few niche sectors, including manufacturing and data centers, the commercial/industrial outlook is poised at best for very modest growth or more likely declines in spending levels moving forward. The AIA Consensus Construc- tion Forecast is calling for essentially no growth this year and next overall in the commercial markets. For industrial facilities, current project activity is expected to produce healthy double-digit spending growth this year, but then stabilize for 2025.
Most of the institutional sectors offer more potential in terms of growth in the near term, according to the AIA Consensus Forecast panelists. The overall sector is projected to increase almost 11% this year and then record another 4% increase next year.
Healthcare construction, a significant institutional sector that has seen growth throughout the pandemic, is poised for a 7% gain this year and an additional 4% next year. Amusement and recreation, a sector that understandably saw little activ- ity during the pandemic, is now poised for a double-digit percentage rebound this year and an additional 4% increase in 2025.
However, expectations are that much of the projected growth in the overall insti- tutional sector will be generated by the education market. Education is the largest institutional component, accounting for almost one in every five dollars spent on non-residential building construction.
Longer-term, spending on educational facilities is largely driven by demograph- ics, namely the increase in the under-age 25 population. There were over 100 mil- lion people under age 25 in the U.S. in 2020. This group is expected to increase by almost 2 million by 2030. The greatest increases are expected to come from the under-10 population, as the number of 10- to 19-year-olds is expected to decline between 2020 and 2030, while the 20- to 24-year-old group is expected to increase only modestly.
However, these estimates may turn out to be too low if immigration numbers
were to increase. This decade, the increase in net immigration is expected to outpace the natural increase in our population
BusinessWest
Outlook
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