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Wells Fargo: CRE Construction Starting to Improve

Contractor and Equipment Supplier Confidence Reaches Historic High
March 17, 2014
A pair of reports from Wells Fargo confirm that both demand for new supply and builder sentiment have ramped up to the point that commercial construction is finally beginning to improve across virtually all property types and U.S. regions.

Demand for office, industrial and retail space are steadily improving amid falling vacancy rates and very little new construction, according to the latest economic commentary from Wells Fargo. While the greatest occupancy improvement continues to be in metro areas with exposure to the energy and technology sectors, the proportion of markets seeing improving conditions and new construction has broadened, Wells Fargo said in its Economic and Financial Commentary released March 14.

In a related 2014 construction forecast from Wells Fargo Equipment Finance, the financial institution said contractors and equipment distributors are optimistic that local non-residential construction activity will improve in 2014 compared to the prior year. The Optimism Quotient (OQ) -- this survey’s primary benchmark for measuring construction industry executive sentiment -- is at a historic high of 124, up 18 points from 2013 and up from the survey low of 42 in 2009.

"The construction industry has come a long way over the last five years," said John Crum, national sales manager for Wells Fargo Equipment Finance. "We see this optimism in responses from across the country and among contractors, dealers, and other stakeholders alike."

In contrast to previous forecasts, contractors are seeing more consistency between residential and non-residential construction, with equally positive sentiment in both sectors, Crum said.

The apartment market has seen the strongest recovery of any major property type, benefiting from both the employment rebound and the decline in homeownership, according to the bank's latest commentary. Most of the growth in households since the recession ended has gone toward rental housing.

Apartments demand has been strongest in areas where job growth has risen the fastest, which tends to be concentrated in major technology and energy sectors. Demand has improved much more broadly, however, and a large proportion of new construction has occurred in and around downtown areas.

Office vacancy rates have fallen less dramatically than the apartment sector but have been gradually trending lower. The national office vacancy rate ended the year at 16.9%, as 28.5 million square feet were absorbed over the course of the year.

While the recovery in office development is still in its early stages, a few trends are emerging. Newer areas of the tech sector are the driving influence behind much of the growth in office demand around the country, both in established tech centers and in many other markets around the country.

Last, demand for industrial space has been another bright spot, benefitting from the explosive growth in online retailing, growth in international trade, the revival in domestic manufacturing activity and the emerging recovery in single-family home building.
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