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Commercial building construction starts fell to historic lows in 2010. Office construction starts tallied 56 million square feet in 2010 — the lowest level of activity since 1960, according to McGraw-Hill Construction.
Hopes for recovery were dashed this past year with construction starts plunging further. The value of construction in 2011 was $787.4 billion, a 4 percent drop from the $803.6 billion in 2010, according to U.S. Census statistics. The decline was primarily a result of tight credit and reduced public spending.
Starts are projected to remain flat this year as existing space is absorbed. This lack of new construction has worried tenants that they won’t be able to locate the space they need, especially large contiguous blocks in Class-A central business districts (CBDs) and suburban buildings in prime locations.
The nation’s corporations are hoarding cash that is estimated at a cool $2 trillion. Although the economic crisis is now behind us, cash-rich corporations are not putting their money back into the economy. This reluctance to spend excess cash translates into less investment in new plants and purchases of technologies.
Corporations are using cash for stock buybacks — suggesting that they’ve run out of new ideas. Stock repurchase produces higher per-share earnings (virtually the same amount of net income divided by fewer shares). Unfortunately, buybacks have not fulfilled their purpose of rewarding investors over the past 10 years.
This lack of investment in research and innovation is setting us up for trouble down the road that can result in slow economic growth.
Conversely, corporations that are able to access cheap debt are a reason for optimism. Target Corp., for example, sold $1 billion of its debt at 1.13 percent in three-year bonds to support an ambitious growth and store remodeling strategy.
Corporate dividends were about $240.6 billion this past year — the largest since 2008, when firms had not yet been hit by the full brunt of the financial crisis and paid a record $247.8 billion in dividends, according to Standard & Poor’s. The rating agency projects corporate dividends to hit a record of $252 billion this year.
With these points in mind, it is clear that the commercial mortgage market still has a long way to go to see stability — let alone a full-fledged recovery. That said, commercial mortgage brokers who understand the factors that control this industry are taking the first step on the path of success despite the market’s ups and downs.
Richard M. Gatto is executive vice president of The Alter Group. Gatto spearheads the group’s business development, corporate services, leasing and build-to-suit activities. Additionally,
he supervises all client-contract negotiations and financial structure underwriting for the company’s portfolio properties. Gatto’s efforts were instrumental in NAIOP’s selection of The Alter Group as its 2010 National Developer of the Year. Reach Gatto at (847) 568-5915.
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