Fitch Ratings: Decelerating CRE Construction Spending Growth

New commercial real estate construction activity should improve “moderately” in 2017 and 2018, although at a slower pace than in recent years, said Fitch Ratings, New York.

Overall construction spending has increased over the past five years and is poised to grow through 2018, albeit more slowly as the construction cycle matures, Fitch said. It predicted construction spending to improve 5.7 percent during 2017 and advance mid-single digits in 2018.

“The commercial construction cycle has matured and current spending levels have already exceeded the peak reported in 2008,” Fitch’s U.S. Building and Materials Handbook said. The handbook examines the current housing, repair and remodel, commercial and public construction environment.

The Census Bureau’s Value of Construction Put in Place report said commercial real estate construction spending grew 8 percent last year to $421.1 billion last year after increasing 8.4 percent in 2015.

Through April, commercial real estate construction spending increased 5.9 percent compared with the prior year, with lodging, office and other commercial construction showing double-digit growth, Fitch said. The ratings agency projected commercial real estate construction will grow 5 percent in 2017 and 3 percent in 2018.

Lenders are tightening their standards for construction and land development loans, Fitch noted, citing the Federal Reserve Board’s latest quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, which said more than 30 percent of banks have tightened standards for approving construction and development loans over the previous three months. In general, larger banks reported more tightening of underwriting standards than small banks.

The Fed survey also indicated 21.1 percent of respondents reported moderately weaker demand for construction and land development loans while just over 11 percent of respondents reported stronger demand.

The value of private office construction grew nearly 30 percent to $61.2 billion last year following a 21.4 percent increase in 2015, Fitch said. By comparison, office construction spending fell 2.6 percent in 2011, 34.6 percent in 2010 and 32.8 percent in 2009. Retail structure construction spending advanced 9.6 percent to $40.8 billion during 2016 after growing 2.9 percent in 2015, Fitch said noting that construction spending for retail  properties fell 27.1 percent during 2010 and 40.9 percent during 2009. Spending on manufacturing and warehouse construction grew 0.5 percent last year to $94.1 billion after growing 30.3 percent in 2015, the report noted.