Liquidity floods commercial construction

As the housing bubble contracts, and the liquidity bubble expands, where's all that liquidity going, aside from lavish bonuses for Goldman Sachs employees?

According to the Christian Science Monitor, a good chunk of it's going into commercial construction:

Residential construction fell 2 percent last year, but private commercial construction rose 16 percent, and public construction was up 10 percent, according to the US Census Bureau. The last time the business was this strong was seven years ago, says Kenneth Simonson, chief economist for the Associated General Contractors.

Behind the commercial-construction push is a combination of powerful economic forces: For one, gigantic investment pools – some from overseas – are looking for places to invest. Also, an enormous growth of imports into the United States is spurring a rush to build new warehouse space.

Did a big ol' red flag just go up in your head, dear reader?  "Gigantic investment pools — some from overseas?"  To me that says people holding dollars looking for a place to unload them.  "New warehouse space" that results from "an enormous growth of imports?"  That doesn't sound like productive investment to me; it sounds like an apparatus to support ever-more consumption.

Granted, Commerce Dept. figures show an increase in factory building of 20% between 2005 and 2006.  But hotel construction is up 52%.

A few experienced hands in the construction business tell the Monitor that what's going on sure looks bubble-licious to them.  Says Alan Beaudette, chairman of the National Association of Industrial and Office Properties:

"We are always concerned when there is so much money out there, it entices people to build what should not have been built in the first place," says Mr. Beaudette, who is also senior vice president of Lowe Enterprises Real Estate Group in Irvine, Calif. "[Five to 10 years ago], it was easier to find high teen returns on your investment, and that is now more difficult."

Hmmm.  The article continues:

In fact, the commercial construction market is driving up the price of essential building materials such as cement, steel, and gypsum. And it goes beyond commodities: There may even be shortages of contractors who can handle complex projects, says Bill Scott, executive vice president at Linbeck Construction in Houston.

"Clients want more individual control, more capability, and flexibility, which adds complexity to how buildings are planned," he says. "There is going to be a shortage of good contractors for highly complex projects."

For example, his company, which normally does not build warehouses, is erecting a large warehouse in the Port of Houston for a long-term client. "It's being planned so the client has great flexibility to rent to a wide variety of people – and that means complex lighting and fire protection," he says.

The Houston project is just part of a huge explosion of warehouse construction. In the Port of Houston alone, some 3 million square feet of new space is being added, Mr. Scott says. "It's all part of the drive to get goods unloaded from ships and moved across the country."

Again, that's all fine and well, but where does this increase the country's productive capacity?!  Where's the capital formation?  Where in any of this is a sign that Americans are making products the rest of the world might be interested in buying?

Oh, sorry, I lost my head there for a second.  It's a New Economy, I forgot.  We think, they sweat.  Silly me.  Better go out and get me a plasma TV on credit so I can keep the Port of Houston chugging right along.

The Daily Reckoning