The June Architecture Billings Index
(ABI) shows that demand for architectural services declined for the third
consecutive month. The ABI is a leading indicator of construction nine to
twelve months in the future.

“This seems to be a case of not thinking it can get any worse – and then it
does,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “While a modest
turn around appeared to be on the way earlier in the year, the overall concern
about both domestic and global economies is seeping into design and
construction industry and adding yet another element that is preventing
recovery.”
(See for charts: <http://www.architectmagazine.com/economic-conditions/abi-report.aspx>
http://www.architectmagazine.com/economic-conditions/abi-report.aspx)

That’s the bad news.

The good news is that fewer new projects means better fundamentals (i.e. rents
and occupancy rates) for existing properties. As I wrote in my forecast earlier
this year, it is looking more and more likely that this cycle will see an
extended period of rent and occupancy growth without the normal effect of new
supply.

For example, the multi-family cycle usually runs abut 7 years… it takes about
18-24 months from a cycle trough for new supply to be planned, built and come
online. During this time existing properties enjoy rising fundamentals. As new
construction comes online, fundamentals begin to flatten. Building usually
continues for about two years past the peak, then oversupply conditions set in
around the sixth year, falling to form the next trough. Then the cycle starts
all over again.

My view is that the existing properties will not have the normal new supply to
compete with for 2-3 years due to the lack of development funding in the
capital markets.

Metros and coastal markets will likely get the attention of private equity
groups who do not rely on debt capital, and stick closer to the normal cycle.
But micro-politans and tertiary markets will benefit from inattention until the
larger markets become crowded.