"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

27 November 2006

Commercial Boom Softens Housing Bust

Commercial Boom Softens Housing Bust
Strong Non-Residential Demand Keeps Local Builders Busy

By Nell Henderson
Washington Post Staff Writer
Monday, November 27, 2006; Page D01

To understand why the housing slump hasn't dragged the economy into a recession, it helps to visit the Smoketown Plaza in Woodbridge, where the thumping of hammers signals the healthy pulse of a building boom that's still going strong.

Just two miles off Interstate 95, hard-hatted construction workers clamber up dusty ladders and scaffolding, hanging wallboard, laying bricks and drilling metal frames in a buzz of activity aimed at completing a new Arby's drive-through restaurant in time to open by mid-December.

Inspecting the progress as she crosses the bare concrete floor, stepping around the pipes and exposed wires and pointing with pleasure to the gleaming metal frame where the menu board will hang, Christy Gilligan envisions how the place will look when hungry commuters rush in after work for a quick bite, entering through a glass foyer with a two-story cathedral ceiling into a dining room seating 84. "I see opportunity," said Gilligan, vice president of development with ACW Corp., of Wilmington, Del., a family-owned Arby's franchiser building the restaurant, its fourth in Prince William County.

Many other executives are making similar calculations across the Washington area and throughout the country, boosting non-residential construction enough over the past year to more than offset the decline in home construction. That boom is helping to cushion the impact of the housing slump on the economy.

The nation's harshest housing downturn in 15 years has unquestionably inflicted pain on many homeowners, builders and their suppliers. The plunge in new home construction was severe enough alone to slice a full percentage point off the nation's economic growth in the July-through-September period, depressing the increase in total economic output to a sluggish 1.6 percent annual rate. And the housing market hasn't hit bottom, according to the figures since then.

But the rest of the economy outside of housing remains largely healthy. With unemployment low, wages and stock prices rising and fuel prices ebbing, consumers continue to boost their spending. And businesses are increasing their capital investment, spending more on buildings, equipment and providing new fuel for the economic expansion.

Builders of non-residential projects say they are simply playing catch-up. So many new neighborhoods filled up during the housing boom that they're still building the stores, offices, restaurants, bank branches, hotels and hospitals needed to serve the influx of residents.

In Prince William County, for example, the population surged by 23 percent in the past five years, during the peak of the home-building boom, to 374,678 people. Now, many residents complain they have to drive too far, often to Fairfax County, for basic business services.

The companies that provide those services "don't build until they see the rooftops" over new customers, said Bill Fairchild, president of R.W. Murray Co., a construction contractor in Manassas that's overseeing the Arby's on Minnieville Road and a dozen other non-residential projects in Northern Virginia. "People have got to get groceries. They've got to get their hair cut. They need to go to the cleaners."

Nationwide, building contractors are expanding factories to crank out more exports to meet rising demand from overseas. Others are modernizing refineries to squeeze more fuel out of oil. And the recent volatility in world oil prices has spurred a wave of investment in alternative fuel plants, said Kenneth Simonson, chief economist of the Associated General Contractors of America. Scores of ethanol plants are under construction or being planned across the country.

The money spent on private non-residential construction nationally rose a sizzling 19.2 percent over the 12 months that ended in September, according to Census data. In addition, state and local governments are building roads, schools and other public buildings. Public construction rose a robust 11.6 percent in the year ended in September. Add it all up and the increase in non-residential work more than offset the 6.7 percent decline in home building over the same period, so the value of all construction rose a net 2.9 percent.

These figures have heartened many analysts, who predict the housing slump will continue to dampen economic growth through next year but will not lead to a recession. "The expected further weakening in housing activity is likely to be largely offset by business capital spending," Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, said in a speech last month.

More pessimistic analysts say it is too soon to know how far or for how long the housing market will slide, or how much it might hurt the rest of the economy. They note that total construction spending fell 0.3 percent from August to September, a trend that would be worrisome if it continued. But so far, they agree, the economy is holding up pretty well. "The problems in housing have not bled into the rest of the job market, at least not yet," said Mark Zandi, chief economist at Moody's

On the contrary, job growth has been so strong that the national unemployment rate fell in October to 4.4 percent, the lowest in more than five years. The Washington area job market is even tighter, with a jobless rate of 3 percent in September, the latest month for which figures are available.

And "if you're any kind of construction worker in the Washington area, it's not hard to find work," said Gene Pinder, business manager for the Baltimore-Washington Laborers' District Council, which represents 7,000 laborers, the workers who pour concrete and asphalt, prepare sites and handle building materials for both residential and non-residential construction projects. "The industry is still red-hot." At general contractor R.W. Murray, for example, "we never stop hiring," Fairchild said. "There's just a shortage in our industry, nationally" of skilled workers.

Lacker, the Richmond Fed President, whose territory includes metropolitan Washington, predicted that "further increases in non-residential construction will allow many workers to simply change construction jobs rather than become unemployed." That is at least partly true, builders said. Some, but not all, residential construction workers can shift to non-residential projects, which typically pay more and require higher skill levels. Among those who can make the change are project managers, site supervisors, accountants and other office workers involved in design, engineering, legal and financial work.

For example, R.W. Murray's site supervisor on the Arby's project, Scott Merryman, previously worked for a home-building company. But much of the work in non-residential construction is more specialized and more complicated than in housing. Such tasks include electrical wiring, installing heating and air conditioning systems, operating multi-story tower cranes and erecting metal frames.

Even installing wallboard in a fast-food restaurant requires different skills than doing so in a house, Merryman said. Companies, too, are suffering different fates depending on how strongly they specialize in housing compared to commercial work.

Home builders KB Home and Ryland Group Inc. have cut hundreds of jobs. Mortgage lenders Countrywide Financial Corp., Washington Mutual Inc. and Ameriquest Mortgage Co. are laying off thousands. Masco Corp. reported a 4 percent decline in its third-quarter profits because of lower sales of its cabinets, faucets, bathtubs, windows, doors and other home fixtures. Weyerhaeuser Co. said its third-quarter earnings fell 26 percent because of lower wood product sales, lumber prices and log prices.

The companies feeling a little less pain are those that also supply or transport materials for non-residential construction. In Chicago, for example, USG Corp., the nation's largest maker of gypsum wallboard, suffered a 3 percent drop in earnings in the third quarter because of the housing slowdown. But the results would have been worse if not for the non-residential market, which accounts for about 40 percent of the company's business, said spokesman Robert Williams. The growing commercial market "certainly does cushion the impact of the softening of the residential market," Williams said.

Many people who live in the neighborhoods that arose during the boom say they're happy to see commercial construction catch up, bringing more services to their neighborhoods. "I remember when I was growing up, it was nothing but houses being built," said Melissa Rook, 20, of Manassas, a college student tapping on her laptop in a Panera restaurant at the Signal Hill Shopping Center. "Now they're always building another restaurant, another place to go." And Rook said she wants more places to go. "I would definitely be happier if there was a bigger mall in Manassas," Rook said, explaining that she often treks to the malls in neighboring Fairfax County for serious shopping.

It was consumers like Rook who prompted Arby's corporate marketing people to advise Gilligan's company to move into Northern Virginia in the late 1990s as the population was expanding. "There was definite potential here," Gilligan said, recalling what she found when she moved to Manassas in 1998.Gilligan said she chose the site at Smoketown Plaza because it is near both new homes and new workplaces, full of hungry suburbanites. She is already planning two more Arby's elsewhere in the county -- jobs that will help keep the construction industry busy. "We're doing very well," Gilligan said. "We're seeing growth."


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