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Why Commercial Construction is the Next Hot Sector
Lee Samaha / MotleyFool.com / November 18, 2013
While a lag between an increase in residential activity and commercial construction is only to be expected, it’s fair to say that the recovery in the latter has been somewhat disappointing in 2013. However, industry surveys and construction data are suggesting that commercial construction could be about to turn.
This chart compares U.S. new housing starts to how many months’ supply of new houses the U.S. has. The lines should mirror each other, because if the housing market is seeing strengthening demand, then the months supply of housing available (blue line) should be falling. Consequently, home builders should be induced to build new housing (orange line) so that line should be going up. With around five months supply at present, history suggests that housing starts should be a lot higher going forward.
And while residential housing is recovering, commercial construction appears to be finally kicking in. For example, the Architectural Billings Index, or ABI, from the American Institute of Architects, is the most closely followed construction index. Fortunately, its indicating that commercial activity has finally picked up after a weather-affected spring.
In addition, the banks are starting to report increased commercial real estate loan demand.
The following chart represents the net percentage of domestic banks that are reporting increased demand for loans.
Note that commercial real estate demand has been strong, and outweighed Commercial and Industrial, or C & I, loans this year. This is unusual, and it could be a negative sign. But it could also owe to the strong state of U.S. corporate balance sheets, plus some reticence to invest thanks to political uncertainties.