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Construction spending up in some sectors

Private commercial building remains flat

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Construction spending -- in San Diego and elsewhere in the nation -- is depressed compared to a few years ago, but can probably be best described as “uneven”: Residential and public projects are enjoying a lift, whereas the private commercial sector is still waiting for signs of life.

“By and large, in residential, we’re doing much better than most other places,” said Alan Nevin, director of economic research for locally based firm MarketPointe Realty Advisors. “On the commercial side, it’s pretty morbid.”

There is little data on actual dollars being spent locally, including land costs, financing and all, but local experts usually point to building permits as an indicator of upcoming construction activity, as well as subsequent consumer spending as people buy houses and furniture.

In the housing arena, total residential building permits in San Diego extended their steady upward trek in May, the most recent data available before publication. According to the Construction Industry Research Board, 435 permits were issued for roughly $449.5 million worth of construction.

The May permits represent a 97 percent increase from April and a 36 percent increase from the year before. More than half of the permits were for multifamily housing, which Nevin said could be due to new construction on Father Joe’s subsidized housing; permits for single-family homes actually decreased month-over-month and year-over-year in May.

For the year so far, 1,585 residential permits have been issued, compared to the 1,335 permits issued during the same period last year -- the worst year for housing permits in San Diego history. It’s a slight improvement, certainly, but 2010 is still very likely to go down as the second-worst year on record, said Alan Gin, an economist at the University of San Diego.

Gin and other economists attribute the rise in permits to an improving local economy. San Diego was among the first to enter the real estate downturn, so some would suggest that it would be among the first to emerge. Builders are gradually getting access to more financing, and the permit data underscores their faith in the strength of a sought-after market.

“They actually now believe that there is a market out there that is underserved,” Nevin said, “and it’s true.”

Still, he said, residential construction is “pitifully low.”

“When you’re producing at 20 percent of the level you were five years ago, there’s not much to get excited about,” Nevin said.

Recently released data on national housing permits also suggests activity will be picking up in the near future: Privately owned housing units authorized in June rose to a seasonally adjusted annual rate of 586,000 from a revised 574,000 in May. Permits were down from 600,000 last year.

The expiration of the homebuyers’ tax credit may dampen single-family construction for a few months, but demand will pick up again because of low interest rates, said Associated General Contractors’ chief economist Ken Simonson.

Economists expect residential construction spending hit bottom last year and will continue improving this year. Industry data company Reed Construction Data said in early July that it expects new residential construction spending to rise 1.7 percent in 2010 -- after a 40 percent drop in 2009 -- and jump almost 20 percent in 2011.

Spending on residential improvements is expected to see no change in 2010 and rise 2.3 percent in 2011, according to Reed Construction.

Permits in the private nonresidential space are also down, year to date. In May, approximately $51.3 million in private nonresidential buildings was authorized, a 33 percent decrease from April but a 51 percent increase from the year before. Between January and May, roughly $260.6 million worth was authorized, compared to $289 million for the same period in 2009.

Considering the year-to-date figures starting two years ago are almost twice those totals, it’s no wonder that experts and private nonresidential contractors alike use words such as “nothing” and “dead” to describe the sector.

Reed Construction Data predicts that national nonresidential construction spending will sink another 22.1 percent this year before rising 5.6 percent in 2011. Non-building construction is expected to only dip 1.7 percent this year and rise 0.6 percent in 2011.

The industrial sector remains the hardest hit: Virtually no industrial buildings were approved in San Diego this year.

But while the private nonresidential numbers hint that projects are not created equal, they don’t quite tell the whole story. Thanks to federal funds, public nonresidential work has continued to flow, including highways, bridges, schools and military bases.

Jim Ryan, executive vice president of AGC’s local chapter, credited the San Diego Association of Governments with drawing federal and state funding to the region and the local TransNet half-cent sales tax for providing additional funding for transportation projects.

“That puts us at an advantage compared to other communities in California,” Ryan said.

Scott Crosby, local chapter president for Associated Builders & Contractors, said he would feel more positive once private construction spending moves up.

“I don’t think stimulus and public spending is a good indicator of an economic recovery,” he said. “There’s only so much spending the government can do, and until private industry starts building things, we’re not going to have a sustained recovery.”

On the national level, private construction spending fell 0.5 percent to $536.3 billion in May from a revised April estimate of $538.9 billion, with dips in both residential and nonresidential. Public construction, which includes education and highways, rose 0.4 percent to $305.5 billion in May from the revised April estimate of $304.4 billion.

Construction spending in May totaled $841.9 billion, down 0.2 percent from $843.3 billion in April and down 8 percent from May 2009. Reed Construction Data anticipates total U.S. construction spending will fall 8.8 percent in 2010 but rise 5.9 percent in 2011.

Much will depend on whether builders can get access to financing, experts agree.

In light of such data, experts agree San Diego’s substantial military presence has been a boon for the local construction industry, particularly in the nonresidential arena.

“Commercial real estate construction, outside of military projects, remains flat on its back,” said Lynn Reaser, chief economist of the Fermanian Business & Economic Institute at Point Loma Nazarene University. “Military construction remains extremely robust … It’s undergoing a boom in building, with activity taking place at all installations.”

Civilian construction contracts, including residential, nonresidential, public buildings and heavy construction, is expected to decline again to $2.5 billion this year before rising to $2.6 billion next year, according to a May report commissioned by the San Diego Military Advisory Council.

Civilian contracts totaled $4.5 billion in 2007, wrote the Fermanian Business & Economic Institute, which compiled the report.

Military construction contracts, on the other hand, have more than quadrupled since 2007 and are forecast to hit $1.4 billion this year and rise to $1.6 billion in 2011.

Stimulus funding and the Army and Marine Corps’ “grow the force” initiative, which includes building more bachelor-enlisted quarters, have contributed to this growth, said NAVFAC Southwest spokesman Lee Saunders.

Of the six installations in the county, Camp Pendleton comprises more than 62 percent of estimated military construction this year.

Another local indicator economists look at is construction employment. Total construction employment dipped a mere 100 jobs in June, the most recent monthly data available, after seeing modest increases for four consecutive months.

Regional construction employment is down 5 percent from a year ago -- much better than the 12.5 percent year-over decline at the state level and more than half of other metropolitan areas in the state, Simonson said.

Declines have been the least steep for specialty trade contractors and building equipment contractors, which points to a need for repair and maintenance work, Reaser said.

The SDMAC report stated that the military comprises 15 percent of regional construction jobs.

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