Monday, May 03, 2010

Q1: Office, Mall and Lodging Investment

by Bill McBride on 5/03/2010 01:30:00 PM

Here are graphs of office, mall and lodging investment through Q1 2010 based on the underlying detail data released by the BEA today ...

Office Investment as Percent of GDP Click on graph for larger image in new window.

This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new all time low (as a percent of GDP).

Reis reported that the office vacancy rate rose to the highest level since the early '90s in Q1 2010 at 17.2%, up from 17.0% in Q4 and 15.2% in Q1 2009. The peak vacancy rate following the 2001 recession was 16.9%. With the office vacancy rate still rising, office investment will probably decline further - although most of the decline in investment has already happened.

Office investment is usually the most overbuilt in a boom, but this time the office market struggled for a few years after the stock market bubble burst and there was comparatively more investment in malls and hotels.

Mall Investment as Percent of GDPThe second graph is for investment in malls.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by over 50% (note that investment includes remodels, so this will not fall to zero). Mall investment is also at an all time low (as a percent of GDP) and will probably continue to decline through 2010.

Reis reported that the mall vacancy rate in Q1 2010 was the highest on record at 8.9% for regional malls, and the highest since 1991 for strip malls.

Lodging Investment as Percent of GDPThe third graph is for lodging (hotels).

The recent boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by almost 2/3rds already..

I expect lodging investment to continue to decline through at least 2010.

As projects are completed there will be little new investment in these categories for some time. Notice that investment in all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly. Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.