U.S. Commercial Construction to Face Tougher Times

U.S. commercial construction surged 12.9% in 2007, responding to high occupancy
rates and easy financing, said an article published recently by Standard &
Poor’s. The article, which is titled "U.S. Commercial Construction: After the
Wave Comes the Trough," says that new activity dropped sharply in the fourth
quarter as financing became more difficult and employment growth slowed. We
expect new commercial starts to weaken further in 2008, but the carry-through
from buildings that reached groundbreaking in 2007 should keep construction
spending above that of 2007.

All categories of commercial construction plus multifamily housing are likely
to weaken, with apartments in the greatest danger and offices the least. On the
positive side, the degree of overbuilding in commercial properties is far less
than it was in the late 1980s, where downtown office vacancy rates were 20% even
before the start of the recession. At the end of 2007, vacancies were averaging
about half that level. But a recession reduces demand for office and retail
space.

Overall, we expect commercial construction starts (inflation adjusted) to
drop 16% in 2008 and 9% in 2009. A deeper recession would mean a worse decline.
In our severe recession alternative, building drops 20% in both 2008 and 2009.
The boom has come to an early end. The good news: It never got too far out of
hand.

The report is available to subscribers of RatingsDirect, at http://www.ratingsdirect.com/. If you are not a RatingsDirect
subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or
sending an e-mail to research_request@standardandpoors.com.

Source: Standard & Poor’s

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