Construction: The Happy Sound Of Hardhats At Work

>>The best news is that commercial and industrial construction will rebound
>>Higher mortgage rates will slow the residential market only slightly from last year

Fueled by improved corporate earnings and robust consumer demand, a rebound in commercial and industrial construction will come in 2004. After a precipitous three-year decline, renovation orders are flowing in. Banking giant Wachovia Corp. (WB ) expects at least to double the number of new branches in the Northeast in 2004. And super-discounter Dollar General Corp. (DG ) plans to open a jaw-dropping 675 new U.S. stores in '04. "There's pent-up demand," says Bruce E. Mosler, president of U.S. operations for real estate services firm Cushman & Wakefield.

At the same time, demand will remain strong in the residential construction market -- despite the possibility that mortgage interest rates could hit 6.75% by yearend, according to David F. Seiders, chief economist at the National Association of Home Builders (NAHB). He expects 1.41 million single-family units to be built in 2004, the third-highest level since 1978, but 3.6% off last year's all-time high. Even builders of luxury houses are confident that a strengthening economy and historically low interest rates will keep construction primed. Spectrum Communities, a Valhalla (N.Y.) high-end homebuilder, will erect 450 dwellings -- up from 375 in 2003 -- with an average price of $500,000. "Not only do people have money, they have the confidence to spend it," says Mitchell C. Hochberg, Spectrum's president.

Still, 2003 was an unprecedented year for residential construction -- a hard one for homebuilders to beat. Federal Reserve rate cuts set off a building boom that was unlike anything since the 1950s. And with the 30-year fixed-rate mortgage dropping to 5.2% in June, the lowest in 45 years, residential housing starts hit 1.71 million.

Lots of Wal-Marts

Higher interest rates this year will result in a retreat from the stratospheric levels of refinancing in 2003, which topped $720 billion in the third quarter. And a glut of new multifamily residences that last year pushed down rents across most of the country -- save for New York and Los Angeles -- means the sector will add space timidly at best. Still, total residential fixed investment will climb 2.4% this year, to $434.1 billion, according to NAHB. "That's a biggie in terms of an economic growth engine," says Seiders.

The cheeriest story -- and perhaps the best sign that the economy has turned the corner -- is that nonresidential construction will return to stable growth in 2004. After shrinking by 5.9% last year, construction of nonresidential space will grow by 2.6%, to 1.38 billion square feet, in 2004. Although still well below 2000 growth levels, stores, offices, warehouses, hotels, and manufacturing will all add space. Indeed, beleaguered manufacturers will finally begin to replace aging factories. And big-box retailers, buoyed by a 1.4% rise in consumer spending in '03, are opening stores frantically: Wal-Mart Stores Inc. will add about 278 new outlets in 2004. In midtown Manhattan, home to the city's toniest shops, tight space pushed retail rents up 21% in 2003 -- a trend expected to continue. Total commercial construction will grow 10.4%, to $68.6 billion, predicts McGraw-Hill Construction. "It's the start of a gradual upturn in commercial construction," says Robert A. Murray, chief economist at that publication.

It's true that businesses continue to keep a tight rein on costs. Just a handful of new headquarters went up in 2003, such as RadioShack Corp.'s (RSH ) 900,000-sq.- ft. build-out in Fort Worth. This year, state and municipal budget woes will mean fewer schools and other public projects. Despite such weak spots, total construction spending will rise 1.6%, to $906.2 billion, and private nonresidential construction will grow 3%, according to Fitch Ratings. "The backlog has been burned off. We're starting to see spending on discretionary projects," says Jeffrey M. Levy, president of EMCOR Group Inc.(EME ), an electrical and mechanical construction company. For the industry, that's creating new room for optimism.

By Brian Grow in Chicago

    Before it's here, it's on the Bloomberg Terminal.