Russia Wharf, the 1 million-square-foot waterfront project by Boston Properties that will include 500,000 square feet of office space, is one of the few commercial projects currently under construction in Boston.
There’s a safety net for the nation’s sluggish housing market after all: commercial real estate.
That’s according to a study sponsored by the National Association of Industrial and Office Properties (NAIOP) Research Foundation, which found the thriving commercial development sector has buffered the slowdown in the residential market.
Using the latest data available, Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University, determined that commercial real estate spending in 2005 added $498.4 billion to the gross domestic product, nearly $12 trillion that year.
By comparison, the federal government contributed $498.8 billion to the GDP in 2005. The basis of commercial real estate’s ongoing sustainability lies in its three phases of development including soft costs such as architects, engineering, marketing, legal, management, site development and tenant improvements; construction costs; and building operations such as maintenance, repair, custodial services, utilities and management, the survey said.
Combined, those three phases represent commercial real estate development’s enduring financial strength and compounded economic impact, the study found. The breakdown shows $228 billion was spent on soft costs, site development and tenant improvement; another $265 billion was spent on the hard costs; and maintenance and operating costs added the remaining $3.6 billion to the GDP, according to the report.
The commercial real estate development industry is also one of the leading employers in the United States, supporting 4.2 million full-time equivalent jobs in 2005 and generating personal earnings of $155.8 billion, the survey found. Every million dollars spent on new construction supports 28.5 full-time jobs, researchers said.
The data and analysis are detailed in “The Contribution of Office, Industrial and Retail Development and Construction on the U.S. Economy,” a report produced using data from the Bureau of Analysis, U.S. Department of Commerce, U.S. Census Bureau, McGraw Hill Construction and a NAIOP member survey.
“By 2005, all sub-sectors of nonresidential construction were accelerating, helping to offset slowing residential building construction outlays in 2006 and 2007,” Fuller wrote in the report. “This counterbalance kept the national economy from experiencing a sharper slowdown in the face of rising energy costs and lost output due to Hurricanes Katrina and Rita.”
The study also identifies the top 10 states by construction value in four categories: office, industrial, warehouse and retail, and by the number of jobs and increase in personal income tied to that construction. Texas leads in industrial construction, while California leads in the other three categories. Overall, for total commercial construction, California ranks first, Texas second and Florida third, followed by Georgia, Illinois, Indiana, New York, Ohio, Virginia and Arizona.
‘So Far Behind’
David Begelfer, chief executive officer of NAIOP’s Massachusetts chapter, said he was not surprised that the Bay State was not ranked among the leading states where construction is under way.
“We don’t have a heck of a lot under construction compared to these other states,” he said. “These other places have cranes galore. Waltham has some construction going on, but we are so far behind because of the office slump and in Boston there are regulatory problems. The [Interstate] 495 area office rents have not risen sufficiently to justify new construction and the vacancies are still high.”
While a number of projects are in the pipeline for downtown Boston – including the revitalization of Filene’s to include 500,000 square feet of office space, another 40 floors of office space at South Station and nearly 1.6 million square feet of offices in the Seaport District – Russia Wharf, an office and condominium tower, is one of the few under construction.
The report represents the first time the commercial real estate industry has been able to quantify the numbers that demonstrate the industry’s considerable and sustained contribution to the U.S. economy. With that data, NAIOP hopes to educate state and local governments, and the public, on the ways that commercial development makes a positive and lasting contribution to their communities. Those ways include supporting job creation, generating earnings and promoting spending activity across the economy.
The NAIOP study comes as a national survey of the housing market found that that home prices have fallen amid a cooling housing market. Global Insight’s recent “House Prices in America” survey found that the U.S. housing valuation analysis shows a widely dispersed drop in single-family home prices, resulting in a continued decline in the incidence of overvaluation in the nation’s housing market.
Nationally, single-family home prices increased in the first quarter at an annualized rate of 2.2 percent. But on a year-over-year comparison, prices are up only 3 percent, further normalizing the market with the weakest gain in a decade. Nearly 50 percent, or 157, of the 317 metropolitan areas in the study experienced price declines in the first quarter, accounting for 38 percent of all single-family units and half of all single-family real estate assets in the nation.
The most highly concentrated declines, while widely dispersed, occurred in areas that had experienced the most dramatic run-up in overvaluation, including New England, California, Florida and New York. The Midwest was hit hard by cutbacks in automobile manufacturing.
Among the most dramatic declines in the nation’s large metro areas were seen in Sacramento, Calif., where prices fell by 8.2 percent in the past year and 10 percent since 2005. On the other hand, prices were most resilient in the Pacific and Mountain Northwest, most of Texas and the Carolinas.
In the local Boston-Quincy metropolitan area, the valuation price is $290,300 – overvalued by a modest 3 percent compared to $360,700 one year ago with an overvaluation of 13 percent.
The House Prices in America study, a joint effort by Global Insight and National City Corp., examines the top 317 real estate markets in the United States, representing 92 percent of the single-family housing market, to determine what home prices should be, accounting for differences in population density, relative income levels, interest rates and historically observed market premiums or discounts.
