LAS VEGAS (Reuters) - The world’s construction equipment makers gather this week for their triennial trade show in Las Vegas, a city that symbolizes their industry’s own mixed fortunes.
Las Vegas is ground zero in the burst U.S. real-estate bubble, an implosion that has prompted residential builders to stop placing orders for new equipment from the companies whose wares are on display here.
Yet commercial construction is on a tear in this gambling Mecca -- as it is in much of the rest of the world -- with nearly 46,000 new hotel rooms either under construction or planned over the next five years.
That frenzied activity has helped offset the decline in U.S. home construction. While Nevada led the country last year in foreclosures and 90 percent of the ZIP codes in Las Vegas saw median house prices fall, the number of workers employed in construction has remained relatively stable, according to Keith Schwer, an economist at the University of Nevada, Las Vegas -- down only about 4 percent.
“If you look at the numbers, we should be deep in the tank,” Schwer said. “But we’ve been hanging on” because of the estimated $30 billion in non-residential construction projects either underway or in development.
But to Schwer and others, the cranes that loom over the city’s casino-dotted main drag also form a series of giant steel question marks at the end of a nagging question: How long can the strength in commercial building offset weakness in residential construction?
In the United States, the question has already been answered and commercial construction has followed residential lower -- though not to the same degree.
"It was weak last year," Jim Owens, the chief executive and chairman of Caterpillar CAT.N said on Tuesday. "In terms of capital goods sales to it, they were off sharply last year."
Few people expect an recovery this year. In a note to investors earlier this month, Goldman Sachs economists declared that U.S. non-residential construction “appears to have turned over after having provided a partial offset to the residential downturn.”
Among the factors making them nervous: a drop in non-residential construction spending in December and January, a decline in architectural billings, and stagnating vacancy rates.
But worldwide, sales of construction equipment remain strong, especially in developing economies with large, rapidly growing populations and inadequate infrastructure -- countries like India, Turkey, South Africa and Russia, where non-residential construction spending is growing faster than
The surge in commodity prices has also led to massive investment in mines and petrochemical facilities, two industries that are big customers of the construction equipment companies.
Caterpillar was so optimistic that the trend would continue that it raised its guidance for 2010 revenue to $60 billion, up from a previous forecast of about $50 billion, citing what it expects to be robust growth overseas. Foreign sales now account for more than 60 percent of its sales.
But back in Las Vegas, not everyone is so sure the local commercial building spree is sustainable -- or wise.
Among the $30 billion in development is the World Market Center, a sprawling furniture trading center in downtown Las Vegas that looks more and more like a white elephant set against the city’s depressed housing market.
Also accounting for some of the cranes over the Strip is an $8 billion, 76-acre development called CityCenter, a joint venture between MGM Mirage and Dubai World, that will feature, among other things, a 61-story, 4,000-room casino-hotel and two 400-room non-gaming boutique hotels -- a small part of the 46,000-room building spree underway.
Schwer worries that the building spurt was “based on ‘07, when the economy was doing pretty good” and local hotels were operating at occupancy rates in the 90 percent level.
But with the U.S. economy now slowing, and with more signs that consumers are pulling back, he wonders if the industry isn’t at risk of overbuilding.
“This is a pretty large number and it may open up a period of reduced prices and stronger competition,” Schwer says, reducing profitability for the casinos in a city that he concedes is still “a one-engine town.”
Editing by Leslie Gevirtz
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