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
Codes and Standards | Feb 21, 2022
More bad news on sea level rise for U.S. coastal areas
A new government report predicts sea levels in the U.S. of 10 to 12 inches higher by 2050, with some major cities on the East and Gulf coasts experiencing damaging floods even on sunny days.
Wood | Feb 18, 2022
$2 million mass timber design competition: Building to Net-Zero Carbon (entries due March 30!)
To promote construction of tall mass timber buildings in the U.S., the Softwood Lumber Board (SLB) and USDA Forest Service (USDA) have joined forces on a competition to showcase mass timber’s application, commercial viability, and role as a natural climate solution.
University Buildings | Feb 17, 2022
A vacated school in St. Louis is turned into a center where suppliers exchange ideas
In 1871, The Carondelet School, designed by Frederick William Raeder, opened to educate more than 400 children of laborers and manufacturers in St. Louis. The building is getting a second lease on life, as it has undergone a $2 million renovation by goBRANDgo!, a marketing firm for the manufacturing and industrial sectors.
Data Centers | Feb 15, 2022
Data center boom: How two AEC firms plan to meet unprecedented demand for data center facilities
Ramboll's Jim Fox and EYP Mission Critical Facilities' Rick Einhorn discuss the recent joining of their companies at a time of unprecedented data center demand. BD+C's John Caulfield leads the discussion with Fox, Ramboll's Managing Director for the Americas, and Einhorn, EYP Mission Critical Facilities' Managing Director.
Resiliency | Feb 15, 2022
Design strategies for resilient buildings
LEO A DALY's National Director of Engineering Kim Cowman takes a building-level look at resilient design.
Products and Materials | Feb 14, 2022
How building owners and developers can get ahead of the next supply chain disaster
Global supply chain interruptions that started at the very beginning of the pandemic are still with us and compounding every step of the way. Below are a few proven tips on how to avert some of the costly fallout should we be faced with similar commercial disasters at any time in the future.
Healthcare Facilities | Feb 10, 2022
Respite for the weary healthcare worker
The pandemic has shined a light on the severe occupational stress facing healthcare workers. Creating restorative hospital environments can ease their feelings of anxiety and burnout while improving their ability to care for patients.
Sponsored | BD+C University Course | Jan 30, 2022
Optimized steel deck design
This course provides an overview of structural steel deck design and the ways to improve building performance and to reduce total-project costs.
Laboratories | Jan 28, 2022
3 must-know strategies for developers in today’s life sciences industry
While the life sciences industry had been steadily growing, this growth exploded when the pandemic arrived—and there is no indication that this lightning-fast pace will slow down any time soon.
M/E/P Systems | Jan 27, 2022
Top 5 building HVAC system problems and how to fix them
When your HVAC system was new, it was designed to keep the indoor environment comfortable, functional, and safe. Over time, that system can drift out of alignment, leading to wasted resources, excessive energy consumption, and reduced occupant comfort.