A Glimmer Of Hope For Commercial Builders

The downward spiral in commercial construction that began in 1990 may be drawing to an end. "Although any significant recovery in commercial construction activity probably lies years away," says economist Susan Hering of Salomon Brothers Inc., "there are hopeful signs that at least the continuing collapse in such outlays could be over."

There is no gainsaying the fact that commercial construction, which includes office buildings, retail and wholesale outlets, and hotels and motels, has experienced a wild roller-coaster ride over the past decade. Aided by new generous tax benefits, real construction outlays soared by 69% from mid-1983 through 1985, moved sideways after Congress took away many of the tax goodies in 1986, and then plunged by 37% between mid-1990 and the end of 1991.

The good news is that the downward plunge slowed markedly last year, with real spending leveling off late in the year. Hering notes that declining commercial construction outlays subtracted half a percentage point from economic growth in 1991, but only 0.1% in 1992.

Meanwhile, Cushman & Wakefield Inc. reports that the office-vacancy rate in central business districts in the third quarter of last year posted its first quarterly drop since 1989. And although construction outlays for stores, hotels, and motels continued to fall last year, the value of permits for new construction of such buildings rose.

While high office-vacancy rates promise to depress overall commercial construction for years to come, such activity in small metropolitan areas appears to be strengthening. And low interest rates and construction costs are inspiring some companies with specialized space needs to construct new offices for their staffs. Thus, says Hering, "although commercial construction won't be adding to GDP anytime soon, it should no longer be a drain on the economy."