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While the overall market is recovering, it’s not an
even recovery, says JLL.
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Building revenue and demand for new commercial
construction may be rising fast—but so are costs. Profitability for new
commercial building projects will be tricky in 2015, as soaring demand may not
lead to soaring profits.
“Leasing momentum is boosting construction demand across
multiple commercial property sectors—but raw material and labor costs are
making it more expensive to get out of the ground than ever before,” said Todd
Burns, President, JLL Project and Development Services, Americas. “Demand is
exploding, but demand isn’t everything. You have to consider the bottom line of
every project to make sure it makes economic sense short- and long-term.”
Affirming rising demand, the American Institute of
Architects’ Consensus Construction Forecast projects that spending on non-residential
construction is expected to rise 7.7% in every commercial property sector this
year. Likewise, the Construction Backlog Indicator, which tracks
non-residential construction, hit a post-downturn high of 8.8 months in the
third quarter of 2014.
A new JLL report on U.S. non-residential construction
activity highlights several trends to watch in 2015:
The construction industry remains 22% below peak
(2007) levels. According to Gilbane, it may take seven to eight more years
to retain previous levels.
Recovery Continues, Backlog Builds. The overall
value of buildings constructed has continued to grow since bottoming-out in
2010. The Construction Backlog Index has grown in all but the Southeast Region,
indicating that 2015 will be a big year for construction. Office vacancy rates
across the country have declined from 14.1% in 2012 to 10.9% in the fourth
quarter of 2014, further strengthening demand. That said, cities with high
labor costs and limited land, like New York and New Jersey, may see construction
activity slow.
Costs Climbing Higher. Although raw material costs
are expected to stabilize in 2015, rising labor costs will force construction
costs continue to grow. Cities such as New York and Chicago will feel the pain
of cost hikes and so will Minneapolis where a massive downtown refurbishment is
underway. Even Atlanta, one of the lowest-cost markets, saw a bump up in
overall prices for the first time since 2008. This could be troublesome for the
education sector, which reported the highest level of spending on construction
in 2014 at $78.7 billion.
The Construction Unemployment Paradox.
Construction unemployment rates remain high, indicating a large potential
employment pool for new construction. However, overall unemployment will drop
quickly as building continues to grow. Though unemployment will drop, costs
will continue to rise due to productivity issues; there is a lack of
construction workers with the right skills and training, frustrating employers
and driving up overall labor costs. Costs are also growing more quickly in
union-centric markets. According to the U.S. Bureau of Labor Statistics, the
lack of available workers with the right training will worsen even as 1.1
million construction jobs are added to the market by 2020. The construction
industry has grown every month of 2014, gaining 48,000 jobs in December to
reach 290,000 total in 2014. However, overall construction employment is still
1.5 million lower than its peak in 2007.
Cheaper to Build Than to Lease. With more demand
for new construction in some markets like Chicago, West L.A. and Seattle,
replacement costs have become lower than purchase prices so constructing new
space is more cost-effective than leasing existing space.
While the overall market is recovering, it’s not an even
recovery. Construction of distribution facilities supporting e-commerce and
retail supply chains will continue to expand, particularly in markets like
Dallas and Miami, where new facilities are needed to support sophisticated
logistics strategies. Conversely, due to a high volume of office projects
started in 2014, more than 16 million sf of new office development is under
construction in Houston; 44% of that space remains unleased, which may cause
vacancy issues for the city down the road, especially if oil prices remain low.
“Vacancy rates for industrial properties have dropped in
the last two years, and competition for big distribution centers has increased
dramatically,” said Dana Westgren, research analyst with JLL. “Particularly in
locations near ports and other key supply chain locations, new construction can
replace older, now-obsolete facilities.”
Download a copy of the JLL U.S. Construction Perspective
for Q4 2014 report here…
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