From residential to commercial to government

It looks like a 1990s Japan-style construction shift is now underway here in the U.S. - after bubbles in residential and commercial building, the government becomes the only big spender left standing.

The Japanese government spent the better part of the last decade of the 20th century covering large portions of the country with concrete and it looks like we're about to do the same thing here on the other side of the Pacific fifteen years later.

Two stories in the news today make this scenario seem much more likely. First, this report from Bloomberg on the reluctance of private industry to begin new building projects.

Commercial Real Estate Poised for 15% Price Drop
By Hui-yong Yu and David M. Levitt

U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

"People aren't willing to do deals right now," said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. "The expectation is that prices will come down."

Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show. Archstone-Smith Trust in August postponed its $13.5 billion sale to a group led by Tishman Speyer Properties LP until October. Mission West Properties Inc., the owner of commercial buildings in Silicon Valley, said on Aug. 13 that the company's $1.8 billion sale may fail after a bank withdrew funding.

"There are so many deals falling apart," said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. "People who can get out are getting out."

This USAToday story chronicles the increased spending by state and local governments, still either flush with cash from the housing boom or able to easily borrow in shaky credit markets.

Building projects fill gap in economy
By Dennis Cauchon, USA TODAY

State and local governments are in the middle of a building boom that has helped keep the economy afloat and offset job losses from the decline in home construction.

The construction of sewer plants, schools, ball fields and other government facilities soared 11.1% in the first four months of the year to a record annual rate of $257 billion, according to a USA TODAY analysis of the most recent Census data.

The fuel for the building spree is the same as it was for the residential housing boom: borrowed money.

State and local governments issued $228 billion in bonds during the first six months of this year, up 28% from last year, Thomson Financial reports.

Tax collections grew a modest 4.7% in the first half of 2007.

Investors have been happy to buy high-rated, tax-exempt municipal bonds as an alternative to the more volatile stocks and mortgage-related investments.

The natural progression is for Washington to take up the slack when the state revenue sources slow or the issuance of new debt becomes less attractive - look for increased federal funding for all sorts of things in the years ahead as the economy slows.

Not that infrastructure improvements would be such a bad thing - you just have to wonder where the money is going to come from.

Property taxes have surely peaked and income taxes may soon follow. Rampant money creation by the federal government is one thing if you are net exporter and creditor nation like Japan, but when you are the world's largest debtor nation, it is quite another.