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.
Related Stories
Sports and Recreational Facilities | Mar 7, 2024
Bjarke Ingels’ design for the Oakland A’s new Las Vegas ballpark resembles ‘a spherical armadillo’
Designed by Bjarke Ingels Group (BIG) in collaboration with HNTB, the new ballpark for the Oakland Athletics Major League Baseball team will be located on the Las Vegas Strip and offer panoramic views of the city skyline. The 33,000-capacity covered, climate-controlled stadium will sit on nine acres on Las Vegas Boulevard.
Adaptive Reuse | Mar 7, 2024
3 key considerations when converting a warehouse to a laboratory
Does your warehouse facility fit the profile for a successful laboratory conversion that can demand higher rents and lower vacancy rates? Here are three important considerations to factor before proceeding.
Shopping Centers | Mar 7, 2024
How shopping centers can foster strong community connections
In today's retail landscape, shopping centers are evolving beyond mere shopping destinations to become vibrant hubs of community life. Here are three strategies from Nadel Architecture + Planning for creating strong local connections.
Market Data | Mar 6, 2024
Nonresidential construction spending slips 0.4% in January
National nonresidential construction spending decreased 0.4% in January, according to an Associated Builders and Contractors analysis of data published today by the U.S. Census Bureau. On a seasonally adjusted annualized basis, nonresidential spending totaled $1.190 trillion.
MFPRO+ Research | Mar 6, 2024
Top 10 trends in senior living facilities for 2024
The 65-and-over population is growing faster than any other age group. Architects, engineers, and contractors are coming up with creative senior housing solutions to better serve this burgeoning cohort.
Office Buildings | Mar 5, 2024
Former McDonald’s headquarters transformed into modern office building for Ace Hardware
In Oak Brook, Ill., about 15 miles west of downtown Chicago, McDonald’s former corporate headquarters has been transformed into a modern office building for its new tenant, Ace Hardware. Now for the first time, Ace Hardware can bring 1,700 employees from three facilities under one roof.
Green | Mar 5, 2024
New York City’s Green Economy Action Plan aims for building decarbonization
New York City’s recently revealed Green Economy Action Plan includes the goals of the decarbonization of buildings and developing a renewable energy system. The ambitious plan includes enabling low-carbon alternatives in the transportation sector and boosting green industries, aiming to create more than 12,000 green economy apprenticeships by 2040.
MFPRO+ News | Mar 1, 2024
Housing affordability, speed of construction are top of mind for multifamily architecture and construction firms
The 2023 Multifamily Giants get creative to solve the affordability crisis, while helping their developer clients build faster and more economically.
K-12 Schools | Feb 29, 2024
Average age of U.S. school buildings is just under 50 years
The average age of a main instructional school building in the United States is 49 years, according to a survey by the National Center for Education Statistics (NCES). About 38% of schools were built before 1970. Roughly half of the schools surveyed have undergone a major building renovation or addition.
MFPRO+ Research | Feb 28, 2024
New download: BD+C's 2023 Multifamily Amenities report
New research from Building Design+Construction and Multifamily Pro+ highlights the 127 top amenities that developers, property owners, architects, contractors, and builders are providing in today’s apartment, condominium, student housing, and senior living communities.