Nonresidential construction activity should remain strong in the U.S. through 2016, although labor shortages and the rising cost of sheet glass will make projects more expensive, according to JLL’s latest Construction Outlook.
JLL sees the South as the country’s “new frontier” for construction, thanks to the region’s low labor and land costs. Conversely, the erosion in oil prices is cramping building in places like Houston whose economics rely heavily on their energy industries.
Sustainable office development pushed renovation activity to new heights in 2015. “This push for new build-outs was not limited to office spaces, with retail and industrial developers redeveloping existing space to include new technology and engage consumers in unique ways,” JLL’s 34-page report states, adding that this trend should continue this year.
The report sees positive signs in construction employment, which outpaced the country’s 4% growth rate. JLL also surveyed development firms that, in the main, agree that construction activity should be steady at least through the second half of 2016, and possibly well beyond that.
Building materials costs, which had increased incrementally since 2010, appear to have plateaued last year. The steel market was flooded by low-cost product, for example. The one notable exception was sheet glass, whose prices have skyrocketed, leading, some construction companies to acquire glass makers to stabilize their costs.
While materials costs are always a concern, JLL notes that labor costs—wages and benefits—have spiked, particularly for skilled workers. Average weekly wages for construction workers rose in December 2015 by 4.2% compared to the same month a year earlier. Massachusetts, New York, and Washington D.C. have the highest weekly construction wages; Georgia, Missouri, and Colorado the lowest.
Industrial sector a ‘shining star’
JLL estimates the value of construction put in place rose 10.2% last year through November, with the Education (up 12% in construction activity) and Manufacturing sectors driving the train. But all of the top construction markets also saw at least a 1% increase in construction costs from the second to the fourth quarter of last year.
“For financial viability, project sponsors will need to strike a balance between the lower costs for some materials, like steel, and the ever-increasing cost of glass and labor,” says Todd Burns, President, Project and Development Services, JLL Americas. “Location continues to be a key driver in finding success throughout various industry sectors. With a slowed growth in construction, executives need to think strategically in terms of where they will invest.”
The researcher sees parallels between construction costs and rents. It points specifically to the San Francisco Bay Area, where construction and office leasing are among the highest in the country.
Nationwide, office deliveries outpaced starts for the first time since the recession, in terms of total square footage, and approached pre-recession numbers. Office completions in every quarter last year were higher than corresponding quarters in 2014. And with the exception of Houston, where office construction was off nearly 42% last year, office construction activity was steady in most top markets.
As of the fourth quarter of last year, there were 88.5 million sf of office space under construction, nearly 9% more than in fourth-quarter 2014. The quarter-to-quarter gains in industrial construction were even more pronounced during this period: 23%. (JLL refers to the industrial sector as nonresidential construction’s “shining star,” and estimates that 178.4 million sf of industrial space were delivered last year.)
Dallas (with 19.7 million sf of industrial space under construction as of the fourth quarter) and Atlanta (19.6 million sf) eclipsed California’s Inland Empire as this sector’s leading markets.
JLL’s take on Retail construction is that while it was off slightly last year, it still showed fourth-quarter gains in all major markets. (Ironically, Houston was the leader, with 2.9 million sf under construction in the fourth quarter, followed by New York City, with 2.7 million.) Retail vacancies across the country declined as the economy improved.
“We have never seen a greater sense of urgency from retailers to address their stores’ role in delivering a ‘True Omni Branded Experience’ for consumers,” says Aaron Spiess, Executive Vice President, Managing Director, Project and Development Services, JLL Americas. “The pressure of emerging digital experiences and platforms has escalated the need to exceed consumer expectations of the store. With the continuous advent of new e-commerce capabilities, this is a trend we expect to continue.”
The 2016 general election looms large in JLL’s forecast. “The upcoming fight over the debt ceiling could delay government buildings and other public works,” its report states. JLL also notes that a slowing global economy could have a silver lining by causing material prices to fall further.
But don’t expect wage costs to taper off any time soon, it predicts. “There remains a dearth of trained construction employees, especially in trade positions, and wages are rising as a result.”
In its final analysis, JLL foresees construction starts will increase at a slower rate than last year, but ahead of the overall economy. “Demand from downstream markets such as Austin, Chicago, Atlanta, and Charlotte will bolster the industry, and construction profit margins will continue to rise, keeping construction growing at a faster rate than the overall economy.”
Related Stories
Market Data | Nov 2, 2016
Nonresidential construction spending down in September, but August data upwardly revised
The government revised the August nonresidential construction spending estimate from $686.6 billion to $696.6 billion.
Market Data | Oct 31, 2016
Nonresidential fixed investment expands again during solid third quarter
The acceleration in real GDP growth was driven by a combination of factors, including an upturn in exports, a smaller decrease in state and local government spending and an upturn in federal government spending, says ABC Chief Economist Anirban Basu.
Market Data | Oct 28, 2016
U.S. construction solid and stable in Q3 of 2016; Presidential election seen as influence on industry for 2017
Rider Levett Bucknall’s Third Quarter 2016 USA Construction Cost Report puts the complete spectrum of construction sectors and markets in perspective as it assesses the current state of the industry.
Industry Research | Oct 25, 2016
New HOK/CoreNet Global report explores impact of coworking on corporate real rstate
“Although coworking space makes up less than one percent of the world’s office space, it represents an important workforce trend and highlights the strong desire of today’s employees to have workplace choices, community and flexibility,” says Kay Sargent, Director of WorkPlace at HOK.
Market Data | Oct 24, 2016
New construction starts in 2017 to increase 5% to $713 billion
Dodge Outlook Report predicts moderate growth for most project types – single family housing, commercial and institutional building, and public works, while multifamily housing levels off and electric utilities/gas plants decline.
High-rise Construction | Oct 21, 2016
The world’s 100 tallest buildings: Which architects have designed the most?
Two firms stand well above the others when it comes to the number of tall buildings they have designed.
Market Data | Oct 19, 2016
Architecture Billings Index slips consecutive months for first time since 2012
“This recent backslide should act as a warning signal,” said AIA Chief Economist, Kermit Baker.
Market Data | Oct 11, 2016
Building design revenue topped $28 billion in 2015
Growing profitability at architecture firms has led to reinvestment and expansion
Market Data | Oct 4, 2016
Nonresidential spending slips in August
Public sector spending is declining faster than the private sector.
Industry Research | Oct 3, 2016
Structure Tone survey shows cost is still a major barrier to building green
Climate change, resilience and wellness are also growing concerns.