by Calculated Risk on 9/10/2008 04:55:00 PM

This morning the WSJ and the NY Times had articles on Mall troubles. See WSJ: Mall Glut to Clog Market for Years and NY Times: A Squeeze on Retailers Leaves Holes at Malls

This should come as no surprise. Historically investment in non-residential structures lagged investment in residential by 5 to 8 quarters. The reasons are pretty clear - the commercial builders (for malls, offices, lodging, etc.) don't build until the residential is in place, and the commercial build cycles are usually longer than residential.

It appears we are now at the end of a Commercial Real Estate (CRE) boom based on the following:

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”
AIA Chief Economist Kermit Baker, June 18, 2008

Click on graph for larger image in new window.

From the American Institute of Architects: Architecture Billings Index Continues in Negative Territory

As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending.

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment in the second half of 2008 and throughout 2009.

From the Fed: The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

Of particular interest is the increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Note that any reading below zero for loan demand means less demand than the previous quarter. This is strong evidence of an imminent slump in CRE investment.

This graph based on data from the Federal Reserve shows the delinquency rates at the commercial banks for three key categories: residential real estate, commercial real estate, and consumer credit cards.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q1 '95 (as delinquency rates declined following the S&L crisis).

It should be no surprise that investment in CRE will decline in the 2nd half of 2008 and in 2009.