One corner of the real estate market might've peaked

Deutsche Bank analysts say the strongest growth in commercial construction is likely behind us.

In a note Wednesday, Nishu Sood and team observe that various measures of on-the-ground spending are near or above 90% of the levels where they last peaked between 2002 and 2008.

They wrote, Are these slowing signs just a temporary setback, or the beginnings of the end of this cycle? Based on our analysis in this report, we think the latter, mainly because of the apparently late stages of the current recovery. We find that most commercial construction metrics are at or near their prior cycle peaks, and funding has also begun to pull back. Overall, this makes it less likely that commercial construction can bounce back and more likely that cyclical headwinds may continue.

They point to the slowdown in the Dodge Momentum Index, which gauges nonresidential construction activity, and is flat on a year-over-year basis.

They also highlight the Architectural Billings Index, a leading indicator of nonresidential construction, which they observe has slowed considerably from its recent peak. Additionally, data from the Federal Reserve's quarterly lending survey, which shows that banks have started to tighten lending standards. Meanwhile, demand for commercial real estate loans is slowing.

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Now, Sood and team are not saying the housing market has peaked. In fact, even for nonresidential construction, a few categories like hotels and retail have significant upside.

They also expect that the housing market will continue to be an engine of economic growth. But a slowdown in manufacturing and chemical-plant construction could lead a meaningful slowdown in commercial construction this year, with almost no signs of a rebound in sight.