Is Construction Dead in America?
At least for a while? Just sit back and think about it for a second.
For the last decade or so, we built and economy on cheap fuel and easy credit. As a result we borrowed and borrowed and spent and spent. As a result of increased spending, we built and built. No deal was too big or financing too hard to obtain. New buildings for mortgage companies, banks, and retailers were built everywhere. Shopping centers and restaurants sprouted up faster than weeds.
Now gas is expensive and credit is becoming harder and harder to obtain. Sales are slowing for many. Businesses are shutting down by the thousands and commercial vacancy rates are skyrocketing. In San Diego, offfice vacany is approaching 20% and even more new inventory is soon scheduled be completed.
Did we build an infastructure for conditions that no longer exist? If so, how much extra square feet of commercial space now exits for current condions? 20%, 30%.....50%? Do we really need so many Starbucks, HomeDepots, and Lowes?
We are just starting to see the commercial shutdowns accellerating. Expect, over the coming months, a significant number of retailers, including auto dealers, boat dealers, and restaurants, to go out of business. Also expect a significant number of layoffs in banking and service industries. As the slowdowns and shutdowns continue, expect the demand for commercial space to fall off even further.
Couple the above with a whole bunch of new space coming to market in the next few months, and we may have 5 to 10 years of retail inventory vacant. A new major area of concern will be how do we deal with the hundreds of billions of dollars of commercial debt now in peril of defaulting?
As commercial defaults rise, expect the cost and qualifications to borrow money for commercial loans to increase. Fewer and fewer projects will likely make sense or cents. As a result, many will likely get cancelled or never get started until current inventory comes into balance with demand.
How long will that take? My guess is a lot longer than many think.....depending how slow things get.
Mohawk's (MHK) earnings tommorrow afternoon could give us some interesting insight where things are headed.