Markets Offer Mixed Blessings in 2003

The U.S. economy may not technically be in a recession anymore, according economists, but the construction market won't be feeling too prosperous anytime real soon.

According to an article in the upcoming November issue of Electrical Wholesaling magazine, in 2003, manufacturers, distributors, reps and contractors can expect the home building and educational construction to remain strong next year. However, the commercial construction, industrial and utility markets will be in for another tough year, according to most forecasts.

The following EW sneak preview offers snapshot summaries broken down by region on what you can expect in 2003.

NEW ENGLAND

The high-tech industry in metropolitan Boston contributes mightily toward New England's prosperity in the good years, but its troubles have hurt the region during this recession.

Layoffs in this industry have driven office vacancy rates to 18 percent in and around Boston. Office construction is dead in downtown Boston, and the area lost over 20,000 manufacturing jobs between June 2001 and June 2002.

While residential construction remains strong, the office market will not recover until 2004, according to Grubb & Ellis Research. Don't expect any immediate improvement in New England's industrial market either. According to the Federal Reserve's Beige Book, some makers of high-tech and aerospace products have so much excess capacity that they don't plan to increase capital spending until 2004.

MIDDLE ATLANTIC

The worst of the recession may be over for New York, New Jersey and Pennsylvania, but it will be a long, slow climb back to prosperity for this region. At mid-year, New York City had lost 98,100 jobs since June 2001 and was faced with an unemployment rate of 8 percent, according to a recent report published by the U.S. Department of Housing and Urban Development.

Much of this economic devastation can be attributed to the 9-11 attacks, but the Big Apple's business services sector was already slipping before the WTC tragedy. However, jobs are coming back to Manhattan — American Express is moving 4,000 employees back into its World Financial Center building from Jersey City, N.J.

New Jersey's suburban office market is still reeling from cutbacks at high-tech firms like Lucent and AT&T and from consolidation at the headquarters of the state's many pharmaceutical companies. Metropolitan Philadelphia's diverse economy has weathered the storm better than other parts of this region.

SOUTH ATLANTIC

The many different metropolitan areas in this region are all having different experiences in this recession. Washington, D.C., and its suburbs got whacked by the high-tech debacle, but they can always depend on the U.S. government to provide a steady source of employment and market demand for office space.

Northern Virginia is also home to Loudon County, one of the nation's fastest-growing housing markets.

Atlanta, another hotbed for housing construction is not quite the same market as it was in the go-go 1990s. Metropolitan Atlanta remains among the nation's leaders in new home construction, but the area's 18.3 percent office vacancy rate is the highest the area has seen in 10 years. As a result, new office construction is down 50 percent from a year ago.

Entirely different factors shape Florida's economy. More people are expected to move into Florida in the next five years than any other state except California, according to the U.S. Census Bureau. This will fuel a still-healthy housing market. Tourism in Florida is still off after the 9-11 attacks, and this has had a ripple affect throughout the economy.

WEST NORTH CENTRAL

While residential construction remains strong in suburban St. Louis, Kansas City and Minnesota, this region is wrestling with severe cutbacks in the aerospace industry. Wichita was hit hard by layoffs by Boeing, Bombardier, Raytheon and other manufacturers of passenger aircraft.

Boeing's layoffs in the St. Louis area also made headlines, although some of those jobs may return soon to service Boeing's new $4.5 billion contract to build F-15 fighter planes. Daimler-Chrysler's cutbacks in St. Louis worsened an already dismal manufacturing scenario in the area.

Office construction in the region is also weak, with Minneapolis' vacancy rate at 12 percent downtown, and nearly 14 percent in the suburbs. Kansas City's downtown office construction market is struggling with a vacancy rate hovering around 15 percent.

According to the most recent Grubb-Ellis report, St. Louis has the strongest office market, with vacancy rates of only 9 percent downtown and 11 percent in the suburbs.

EAST NORTH CENTRAL

The Rust Belt reflects much of what's good and bad with the current economy — the industrial market is in the dumps; residential construction is hanging tough; and office construction is spotty and dependent on the local employment picture. With so much of the region's industrial might tied to the auto market, when Motor City sneezes, the rest of the region catches a cold.

Skeptics wonder how long Detroit's automakers can rely on the fumes of zero-percent financing to continue to drive new car sales. Office vacancy rates are ugly in many metropolitan areas, as you can see from the following Grubb-Ellis figures: Chicago - 20 percent vacancy rates downtown and 19 percent in the suburbs; Detroit, 25 percent vacancy rates downtown and 11 percent in the suburbs; and Milwaukee, 12 percent vacant downtown and 13.8 vacant in the suburbs.

Still, some new construction projects are pumping some life into the region's economy. Ford Motor Co.'s supplier campus being built near its South Side Chicago assembly plant will have 800 employees by 2003, and Champion Laboratories' $30 million plant expansion in southern Illinois will retain 1,500 manufacturing jobs, according to the U.S. Department of Housing and Urban Development.

WEST SOUTH CENTRAL

While telecommunications, computers and other high-tech industries are woven into this region's economic fabric, the energy market still dominates much of the economy along the Gulf Coast. A Federal Reserve report published last month said demand for petrochemical products was down, but that prices for diesel fuel, natural gas, heating oil and crude oil were increasing.

Layoffs in the telecom industry have rocked Dallas and San Antonio. When SBC Communications laid off several thousand workers in San Antonio at the end of last year, it also put nearly 200,000 sq. ft. of office space onto the local market.

Texas' housing market remains strong, as Austin and Dallas continue to be among the nation's leaders in new housing starts. The office construction market is a mixed bag. Dallas is in the doldrums, with 29 percent downtown vacancy rates and 22 percent vacancy rates in the suburbs, but Houston, with a 9 percent downtown vacancy rate and San Antonio, with an 11.6 percent downtown vacancy rate, have low vacancy rates compared to other areas of the United States.

EAST SOUTH CENTRAL

Like most other regions of the country, Alabama, Kentucky, Mississippi and Tennessee benefited from steady residential construction but were saddled with troublesome unemployment rates and high office vacancy rates in metropolitan areas.

But the construction or expansion of auto plants in the region bode well for the future. According to the U.S. Department of Housing and Urban Development, Nissan plans to make an additional $500 million investment in a $930 million assembly plant that's already under construction in Madison County, Mississippi. The plant will employ 5,300 people when finished. Alabama, already has auto plants that have created jobs for 27,000 direct employees and an estimated 48,000 indirect jobs in the state.

In addition, the state recently got the good news that Honda will double production capacity for its Odyssey minivans and add 2,000 jobs to its plant in Lincoln, Ala. Mercedes-Benz, Toyota, and Hyundai already have plants in Alabama. Tennessee will also be the beneficiary of auto industry expansion, as Nissan and Saturn plan to add jobs at their facilities in the Nashville area.

MOUNTAIN

With its focus on high-tech, computers and telecommunications, this region is suffering from a typical boom/bust syndrome. When times are good, they are very good, but when times are bad, they are a disaster.

With layoffs in these industries, the office vacancy markets in the region's largest cities — Albuquerque, Denver, Las Vegas, Phoenix and Salt Lake City — aren't pretty. Denver, Phoenix and Las Vegas have office vacancy rates of at least 20 percent.

Yet, this region remains a high-growth area, with an enormous amount of residential construction. While down from their record residential construction numbers of the 1990s, Denver, Phoenix and Las Vegas still rank among the top homebuilding markets in the nation. In fact, the combined total of 59,000 building permits issued for single-family homes in these three market dwarf the total number of permits issued for single-family homes in any states except for California, Florida and Texas.

And while the economic picture isn't expected to improve much until mid-2003 in Arizona and Colorado, these two states still rank among the Top 10 fastest-growing states in the United States, in terms of in-state migration.

PACIFIC

This region's many micromarkets are riding out the recession with various degrees of success. With their more diverse business base, San Diego, Los Angeles and other parts of Southern California are faring better than their neighbors to the north in Silicon Valley and San Francisco, which rely much more heavily on tech industries.

With the nation's largest port complex in the United States, projected increases next year in international trade will bolster Los Angeles' robust import/export business. Additionally, the surge of new home construction in Southern California continues; increased military spending is helping the aerospace industry.

With office vacancy rates at or below 10 percent, San Diego has the region's healthiest office market. In contrast, downtown construction is dead in San Francisco, and its office vacancy rate is above 20 percent. The dot-com implosions is in part responsible for these vacancy rates. Up the coast, Oregon's diversification from its historical base in wood products industries to semiconductors and other light industry has helped it weather the storm better than in past recessions. The Seattle market is still suffering from 19,000 layoffs at Boeing.