Commercial Construction Outlook: Weak - Analyst Blog
August 17 2011 - 8:50AM
Zacks
Today the American Institute of Architects (AIA) released its
Architecture Billings Index (ABI) for July. It is a “Magic 50
index” sort of like the ISM, where any reading over 50 means that
billings for architectural services are increasing, and below 50
indicates a contraction. The ABI fell to 45.1 down from 46.3 in
June, its fifth decline in a row. It is now at its lowest level
since February 2010.
Why should we care about the ABI? Because it is the best leading
indicator out there for construction spending outside of
residential investment in single-family homes. Construction of
office buildings, hotels, shopping centers, hospitals, schools and
apartment buildings almost always requires the services of an
architect, even for stores that appear to be cookie-cutter copies
of other stores in a chain.
If work slows down for architects, then nine to twelve months later
so will construction work on those sorts of big projects. Here is
the history of the index.
The index fell dramatically in early 2008 -- after the recession
officially started, but long before it was widely acknowledged to
be underway. It stayed deeply in negative territory until late in
2010, but has again been on a steep declining trend since the start
of this year.
Given the lag between when the architects draw up the plans and
when the actual construction happens, that means we might get a
little bit of help in GDP growth from non-residential construction
in the third and fourth quarters of this year, but it is not going
to last. It will once again be a drag on GDP growth by first
quarter of 2012.
While so far the index is still well above the lows it was during
the darkest days of the recession in late 2008 and early 2009, the
trend is not good, and we sure don’t need any more drags on
economic growth.
In the second quarter of this year, investment in non-residential
structures added 0.20 points of the 1.30% growth. In the first
quarter it subtracted 0.40 points from growth. In other words, if
non-residential construction has simply stayed unchanged from the
fourth quarter, then growth in the first quarter would have been
0.8% not 0.4%.
Breakdown by Region and Sector
The weakness was widespread, both geographically and by type of
work. Regionally, the South was the strongest, with a reading of
46.9, followed by the West at 46.6. The Northeast had an index of
46.4 and the Midwest was the worst at 44.9.
The AIA tracks activity by the predominate type of practice in
architects offices. The commercial/industrial sector had a reading
of 47.9. That covers the construction of things like office
buildings, hotels and shopping centers. The reading for
Institutional activity, the building of things like schools and
hospitals, was 47.2.
Institutional activity is largely driven by public spending, and
with the money from the ARRA gone, that activity is drying up.
Mixed practice was at 47.1 and multi-family residential was at
44.7. It is surprising that the multi-family residential was the
weakest of the four areas, since apartment vacancy rates have been
falling, and rents are starting to rise.
The multi-family sector has been the one relatively strong area of
residential investment of late. In July, housing starts for
buildings with five or more units were up 66.7% over July of 2010,
while single-family starts were down 0.9% year over year.
The renewed weakness in the ABI is bad news for firms that rely on
non-residential construction. Some examples of firms that would be
hurt by further weakness in the commercial construction sector of
the economy are
Watsco (WSO),
AAON
Inc (AAON),
Lennox International (LII),
Martin Marietta Materials (MLM) and
Texas
Industries (TXI). All this, not to mention the
long-suffering construction industry, which has been responsible
for 30% of all jobs lost since the start of the Great
Recession.
AAON INC (AAON): Free Stock Analysis Report
LENNOX INTL INC (LII): Free Stock Analysis Report
MARTIN MRT-MATL (MLM): Free Stock Analysis Report
TEXAS INDS (TXI): Free Stock Analysis Report
WATSCO INC (WSO): Free Stock Analysis Report
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