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Tuesday, February 01, 2011

Q4 Investment: Office, Mall, Lodging and Residential Components

by Calculated Risk on 2/01/2011 08:30:00 AM

The advance Q4 GDP report released last Friday showed a small annualized real increase of 0.8% for investment in non-residential structures. This broke a streak of nine straight quarterly declines. Note: this gain might be revised away.

With the release of underlying detail data yesterday - we can see that the reported small gain for non-residential structure investment in Q4 was mostly for power and petroleum mining structures.

If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q4.

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

This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959).

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 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).

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.

Notice that investment for 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.

The second graph is for Residential investment (RI) components. According to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes).

Residential Investment ComponentsThis graph shows the various components of RI as a percent of GDP for the last 50 years. Usually the most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $151.6 billion Seasonally Adjusted Annual Rate (SAAR) in Q4 (about 1.0% of GDP), significantly above the level of investment in single family structures of $106.2 billion (SAAR) (or 0.7% of GDP).

Brokers' commissions increased slightly in Q4, but are near the lowest level (as a percent of GDP) since the early '80s. In dollar terms, brokers' commissions are back to the 1998 / 1999 levels.

And investment in multifamily structures has been bouncing along at a series low for the last few quarters, although this is expected to increase in 2011.

These graphs show there is currently very little investment in offices, malls and lodging - and also very little investment in most components of residential investment.