In stark contrast to the steep decline in occupied space across the office, retail, and apartment sectors throughout 2008, completions were delivered in a relatively uniform fashion each quarter. However, over 40% of the projects scheduled to come online in the fourth quarter have either been delayed to 2009 or cancelled. Read the complete construction report.

1. Construction First Glance 2008
Quarter 4
Pre-Release Analysis of Fourth Quarter 2008 Reis Findings for Construction Activity
units). Over the last 12 months, completions were led by
Victor Calanog PhD Houston (14,156 units; 3.1% of inventory), Dallas (7,751 units;
Director of Research 2.0% of inventory), Los Angeles (6,027 units; 0.8% of inven-
tory), Atlanta (5,748 units; 1.7% of inventory) and Austin
New York — January 15 2009 (5.283 units; 3.7% of inventory).
Office Sector
Construction Activity Overview Fourth quarter completions of 15.010 million square feet rep-
resent an decrease relative to fourth quarter completions of
In stark contrast to the steep decline in occupied space 22.427 million square feet in 2007. We are skeptical about
across the office, retail and apartment sectors throughout the sector’s ability to deliver the 49.18 million square feet of
2008, completions were delivered in a relatively uniform total space projected to
fashion each quarter. The Commerce Department reports†
12 Month Change in Office Inventory
come online by the end of 1.0%
that seasonally-adjusted private residential construction 2009. Developers will be
spending fell by 23.4% between November 2007 and Novem- hesitant to commit to add- 0.8%
ber 2008. However, private nonresidential construction ing new space in an eco-
spending (excluding office buildings) grew by 9.1%. Over nomic environment char-
40% of projects scheduled to come online in the fourth quar- acterized by surging levels 0.6%
ter have either been delayed to 2009 or cancelled. Reis ex- of sublease space.
pects more delays and cancellations in 2009 unless eco- 0.4%
nomic conditions (particularly credit availability for develop- Leading markets for
ers) improve dramatically. fourth quarter comple-
tions include the Houston 0.2%
(1.11 million SF), Austin
Fourth Quarter 2008 Completions (1.02 million SF), Dallas 0.0%
(0.99 million SF), San
Apartment (units) Office (square feet) Retail (square feet) Francisco (0.99 million SF)
and Palm Beach (0.78 mil- -0.2% 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08
Q4 2008 24,226 15,010,000 5,867,000
lion SF). Over the last 12
Q3 2008 22,643 14,283,000 4,838,000
months, completions were led by the Suburban Virginia (5.59
Q2 2008 28,178 14,212,000 6,408,000 million SF; 4.2% of inventory), Houston (4.33 million SF;
2.8% of inventory), Chicago (4.24 million SF; 1.8% of inven-
Q1 2008 21,749 14,573,000 3,983,000
tory), Dallas (3.93 million SF; 2.6% of inventory) and Seattle
Apartment and office figures are based on 79 metros; retail, on 76 metros
(2.84 million SF; 3.9% of inventory).
Apartment Sector Given that the US is in the middle of what may well be the
longest recession since the Second World War, Reis projects
Multifamily completions for the fourth quarter of 2008 to- a rise in vacancy and negative net absorption through 2011.
taled 24,226 units, slightly lower than the figure of 30,706 The sharp decline in asking and effective rent growth in the
units that came online in the fourth quarter of 2007. Ap- fourth quarter marks the beginning of what Reis foresees to
proximately 93,000 units are scheduled for completion in be at least two years of negative rent growth.
2009, a figure that is representative of the latest information
from developers. Delays or cancellations are to be expected, Retail Sector
given the unprecedented decline in credit availability over
the last four months of 2008, combined with job losses and Approximately 5.9 million square feet of neighborhood and
contraction in consumer community shopping centers were completed in the fourth
spending. If this amount quarter. This quarter
12 Month Change in Apartment Inventory
of new completions do in 2.0% 12 Month Change in Retail Inventory marks the fourth point in
1.5%
fact materialize in 2009 Reis’s quarterly history
these buildings will face 1.8% that the retail sector has
tough market conditions 1.6% ever registered negative
1.0%
and will serve as a supply absorption. The 50 basis
glut that may depress re- 1.4% point jump in vacancy from
covery once the economy 1.2% 8.4 to 8.9% is also the
0.5%
rebounds. largest single-quarter in-
crease in vacancy since
1.0%
Leading markets for com- 0.8% Reis began reporting quar-
0.0%
pletions in the fourth terly performance figures
quarter include Houston 0.6% in 1999.
(3,715 units), Phoenix 0.4%
-0.5%
(1,393 units), Fort Worth Leading markets for com-
(1,251 units), Austin (1,183 0.2% pletion include Houston
units) and Orlando (1,115 0.0% (0.54 million SF), Phoenix
-1.0%
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08

2. (0.45 million SF), Orlando (0.45 million SF), Tampa (0.43 mil- cember 2007.
lion SF) and Suburban Virginia (0.33 million SF). Over the
last four quarters, completions were led by Houston (2.21 According to December’s preliminary employment estimate,
million SF: 2.7% of inventory), Phoenix (2.17 million SF; 3.3% construction payrolls fell by 265,000 jobs between Septem-
of inventory), Chicago (1.67 million SF; 1.7% of inventory), ber and December. Construction payrolls fell by 632,000
Dallas (1.62 million SF; 3.1 % of inventory) and Las Vegas jobs between December 2007 to December 2008, with
(1.54 million SF; 5.6% of inventory). 120,400 jobs lost in residential construction. Non-residential
job losses in the last year total 53,400 jobs. Construction
Reis is currently tracking retail projects scheduled for com- earnings grew only by 1.3% from September to December
pletion in 2009 that will result in inventory additions of 19.6 but climbed 5.0% over the past year despite the job losses.
million square feet, about 5 million square feet less than what
Changes in Employment
was projected last quarter. Like the apartment and office
sectors, we expect delays and cancellations to occur. Quarter 12 Month
Construction Employment -3.7% -8.5%
Nonresidential Construction Employment -2.8% -6.7%
Construction Costs
12 Month Change in Consumer and
Construction Wages 1.3% 5.0%
Construction Prices
14%
Source: Bureau of Labor Statistics (As of December 2008)
The relatively modest
level of completions
12%
(compared to previous
Note: History and 2008 inventory addition calculations are for 79 markets
10%
boom periods) may end for apartment and office; 76 markets for retail. † Census Bureau,
up serving as a boon to November 2008; ‡ Bureau of Labor Statistics, December 2008
8%
commercial real estate
6%
in the face of the current Copyright © 2009 Reis Inc.
recession: there will be
4%
less of a glut that may
2%
delay recovery once the
economy rebounds. This
0%
restrained pace of con-
2003 2004 2005 2006 2007 2008
struction was driven by
Consumer Price Index for Urban Consumers
Source: BLS
Inputs to Construction Industries
the high relative price
level of construction
materials set by the growth spike from 2004 to 2006. The
exception will be metropolitan areas relatively more depend-
ent on financial services
firms for employment. 12 Month Change in PPI
Markets like New York 12%
City are currently being
flooded with sublease 10%
space that will act as a
virtual supply glut, con- 8%
straining rent growth
even after job growth 6%
resumes.
4%
Construction and labor
2%
costs declined from Sep-
tember to December
0%
2008. The Producer
Price Index (PPI) for -2%
‡
construction materials 1998 2000 2002 2004 2006 2008
and their components fell Materials & Components for Construction
by 3.0% between the
third quarter of 2008 and fourth quarter of 2008, yielding a
year over year change of 7.3% from December 2007 to De-
cember 2008. By way of comparison, the index increased
year over year by 4.4% in December 2006 and 2.0% in De-
Changes in Producer Price Index
Quarter 12 Month
Materials & Components for Construction -3.0% 7.3%
Commercial Electric Power 3.8% 8.5%
Industrial Electric Power 4.0% 5.9%
Cement 2.0% -0.6%
Concrete 1.1% 4.3%
Source: Bureau of Labor Statistics (As of December 2008)