Wednesday, August 04, 2010

Q2: Office, Mall and Lodging Investment

by Bill McBride on 8/04/2010 04:07:00 PM

First - the advance Q2 GDP report released last week showed an annualized real increase of 5.2% for investment in non-residential structures. This broke a streak of seven straight quarterly declines. However the construction spending report released on Monday suggests that most of this gain will be revised away.

Second - with the release of underlying detail data today - we can see that most of the reported gains in Q2 were for power and petroleum mining structures. My guess is some of this investment was related to the BP oil gusher.

If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q2.

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 series low as a percent of GDP (data series starts in 1959).

Reis reported that the office vacancy rate is at a 17 year high at 17.4% in Q2, up from a revised 17.3% in Q1 and 16.0% in Q2 2009. With the office vacancy rate still rising, office investment will probably decline further - although most of the decline in investment has already happened.

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 two-thirds (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP) and will probably continue to decline through 2010.

Reis reported that the mall vacancy rate increased in Q2 2010, and was the highest on record at 9.0% for regional malls, and the highest since 1991 for strip malls.

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

The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already. And 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.

Also 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 (flat as a percent of GDP for 2 or 3 years). Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.