Last year ended on a hopeful note for builders and developers, with new construction starts in December up 19% to a seasonally adjusted annual rate of $450.2 billion, according to McGraw Hill Construction.

Non-residential building in December climbed 25% to an annual rate of $159.2 billion, according to the monthly McGraw Hill report on starts, which was released on Jan. 21.

Residential building was also up, the report said, rising 3% to $128 billion, the fifth straight month of modest improvements following a relapse in activity last spring and summer.

While housing continues to gain momentum and is expected by NAHB economists to make slow but steady progress throughout 2011, which bodes well for the commercial sector, Robert Murray, vice president of economic affairs for McGraw-Hill Construction, noted that construction activity overall would benefit from an improvement in loan activity and more solid job growth. Tightening government budgets will be a constraint this year, he said.

“It looks like we are in a steady, leveling-out period,” said Gene Graf, chairman of the NAHB Commercial Builders Council Board of Trustees and a builder in Boseman, Mont.

“In the retail sector, it’s very difficult to match up capitalization rates with the rents that retailers are willing to pay,” Graf said. “In addition, the increase in oil prices and its effect on the cost of materials has made construction costs rise dramatically.”

“On the residential side,” he said, “the bump in housing sales in December might have come from people who were waiting to buy until they were sure there was a bottom, and the slight increase in mortgage interest rates towards the end of the year made them jump. I think this indicates there is some pent-up demand, and the rise in rates forced a lot of people to make a decision.”

NAHB Senior Economist Bernard Markstein said that the severity of the recession may have delayed as many as two million household formations. Along with a growing U.S. population and the need to replace aging units that drop out of the housing stock, this will add to housing demand as the economy continues to improve and people who doubled up with family and friends decide it’s time to strike out on their own.

Looking at various commercial sectors, Markstein noted that retail is still falling, but not as rapidly as earlier, and won’t turn around for a year or two.

Manufacturing has continued to fall, he said, but is poised to rebound as consumers spend more freely.

One small positive, he said, is that warehouses will be turning up and showing “a bit of improvement.”

He added that the availability of credit for builders has remained extremely tight, and restoring the flow of financing is the critical challenge that will determine how much further and forcefully the formative real estate recovery continues.

For 2010 as a whole, McGraw Hill reported that nonresidential building dropped 9% to $152.0 billion. The commercial sector retreated 17%, not as steep as the 43% decline that occurred in 2009.

Store construction fell a relatively moderate 8% last year, according to McGraw Hill, as a steady volume of remodeling work partially offset decreased activity for additions and projects classified as new.

Other major commercial categories were not as resilient in 2010, with declines of 21% in warehouses, 24% in offices and 29% in hotels.

Following in housing’s footsteps, commercial building can expect to see gains in 2011, Markstein forecasted, but it will take a few years for activity to return to normal healthy levels.

For information on commercial building resources available from NAHB, e-mail Carmel Nayman, or call her at 800-368-5242 x8410.