Report: U.S. Office, Shopping Center Construction Spending May Fall 13 percent in 2010

Recovery predicted to begin in 2011.

Construction spending on hotels, office buildings and retail centers may fall 13 percent this year, the second straight annual decline amid a drop in property prices, the American Institute of Architects said.

The Washington-based group’s forecast is more severe than an estimate it made in July, when it predicted a 12 percent decrease. Spending will turn “marginally” higher in 2011, the group said today.

“The magnitude of the downturn has set in,” Kermit Baker, the group’s chief economist, said in an interview. This year’s expected drop compares with a decline of about 20 percent in 2009. “Another bad year is the bottom line, but there are some prospects of recovery as we get into 2011.”

U.S. commercial real estate values sank to the lowest level in seven years in October as job losses cut demand for apartments, offices and retail space, Moody’s Investors Service Inc. said last month. Office vacancies may approach 20 percent in 2010, according to Jones Lang LaSalle Inc. and Grubb & Ellis Co. Unemployment was 10 percent in November after a 26-year high of 10.2 percent the prior month, the Labor Department said.

Commercial construction spending will probably have a “marginal increase” of 1.8 percent next year, according to the architects group.

That forecast “still implies a weak first half of 2011 and a stronger second half,” Baker said.

Industrial construction spending is likely to slump the most this year, 24 percent, and an additional 7.8 percent in 2011, the institute said.

The group expects hotel building to also fall about 24 percent this year, before rising 5.4 percent in 2011.

Spending on office buildings may drop 19 percent this year and then increase 12 percent in 2011, while retail construction is likely to decline 17 percent this year before climbing 3.2 percent next year, the group said.

The AIA Consensus Construction Forecast uses projections from sources including Moody’s, the Portland Cement Association and management-consulting firm FMI Corp. The report, issued twice a year, forecasts U.S. construction spending over 12 to 18 months.

Source: Bloomberg News, Daniel Taub