While financial problems persist, both the residential and commercial segments of the construction industry should be getting ready to take advantage of improving market conditions as the economic recovery gradually gains momentum, according to Jim Haughey, chief economist for Reed Construction Data.

“Contractors and their suppliers should be shifting their focus now from coping with a declining market to planning for an expanding market,” Haughey says in his 2010 construction forecast, which was released on May 5.

“Most construction market companies will have to deal with unpaid debts from the long recession and lingering credit rating and equity participation shortfalls for another year or more,” he says. “Nonetheless, they should be preparing to get a share of soon expanding bid opportunities as soon as they are able to arrange for more capital or credit.”

With all of the three most cyclical sectors of the economy — business investment, inventory investment and consumer durables consumption — now expanding, “the economic recovery is sustainable,” he writes, “and it will soon lead to increasing demand for building space and facility capacity.” This has already occurred in many housing markets, according to Haughey.

“With space and facility completions continuing to slow, the space and capacity surpluses that prevent new project starts will soon be ebbing. Market by market, project type by project type, this turnabout will gradually happen over the next year,” he says.

“How quickly construction activity begins to expand depends on how long it takes to absorb the existing space and capacity surplus,” he says. “In turn, this depends on the current size of the surplus and the timing and pace of increasing demand. Uniquely in this business cycle, the lag between economic recovery and construction recovery also depends on how quickly access to credit returns to normal.”

According to the Reed Construction forecast, the decline in commercial construction spending will slow sharply during the balance of 2010, with spending turning up at the end of the year. Starts should now be bottoming out.

Commercial construction spending fell 13% in the four months through February, including a 30% drop for hotels, 12% for offices and 6.5% for retail.

By the time that recently started projects are finished late this year and in 2011, commercial occupancy and rental rates will be on the rise, according to the forecast, although some cities will still be lagging. Also, even where occupancy rates are up, the report says, the expected net operating income of newly completed building will be too low to spur developers to add more space, and it will still be cheaper to buy than build.

“But within a year there will be more niches where it is cheaper to build than buy,” says Reed. “A share of these buildings will start soon. In some cities, this will be in the form of previously started then suspended projects being resumed with new financing.”

First to recover will be the retail sector, followed by offices and then hotels. “Lodging will be the last to recover because of the recent overbuilding in casino and destination hotels which dominated the hotel construction market in recent years. Construction of hotels targeted to consumer and business travelers will recover much sooner than construction of destination hotels.”