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
| Aug 11, 2010
Giants 300 University Report
University construction spending is 13% higher than a year ago—mostly for residence halls and infrastructure on public campuses—and is expected to slip less than 5% over the next two years. However, the value of starts dropped about 10% in recent months and will not return to the 2007–08 peak for about two years.
| Aug 11, 2010
200 East Brady
Until July 2004, 200 East Brady, a 40,000-sf, 1920s-era warehouse, had been an abandoned eyesore in Tulsa, Okla.'s Brady district. The building, which was once home to a grocery supplier, then a steel casting company, and finally a casket storage facility, was purchased by Tom Wallace, president and founder of Wallace Engineering, to be his firm's new headquarters.
| Aug 11, 2010
Great Solutions: Business Management
22. Commercial Properties Repositioned for University USE Tocci Building Companies is finding success in repositioning commercial properties for university use, and it expects the trend to continue. The firm's Capital Cove project in Providence, R.I., for instance, was originally designed by Elkus Manfredi (with design continued by HDS Architects) to be a mixed-use complex with private, market-...
| Aug 11, 2010
Reaching For the Stars
The famed Griffith Observatory, located in the heart of the Hollywood hills, receives close to two million visitors every year and has appeared in such films as the classic “Rebel Without a Cause” and the not-so-classic “Charlie's Angels: Full Throttle.” Complete with a solar telescope and a 12-inch refracting telescope, multiple scientific exhibits, and one of the world...
| Aug 11, 2010
Holyoke Health Center
The team behind the new Holyoke (Mass.) Health Center was aiming for more than the renovation of a single building—they were hoping to revive an entire community. Holyoke's central business district was built in the 19th century as part of a planned industrial town, but over the years it had fallen into disrepair.
| Aug 11, 2010
The Art of Reconstruction
The Old Patent Office Building in Washington, D.C., completed in 1867, houses two Smithsonian Institution museums—the National Portrait Gallery and the American Art Museum. Collections include portraits of all U.S. presidents, along with paintings, sculptures, prints, and drawings of numerous historic figures from American history, and the works of more than 7,000 American artists.
| Aug 11, 2010
Seven tips for specifying and designing with insulated metal wall panels
Insulated metal panels, or IMPs, have been a popular exterior wall cladding choice for more than 30 years. These sandwich panels are composed of liquid insulating foam, such as polyurethane, injected between two aluminum or steel metal face panels to form a solid, monolithic unit. The result is a lightweight, highly insulated (R-14 to R-30, depending on the thickness of the panel) exterior clad...
| Aug 11, 2010
Back to Nature: Can wood construction create healthier, more productive learning environments?
Can the use of wood in school construction create healthier, safer, more productive learning environments? In Japan, there's an ongoing effort by government officials to construct school buildings with wood materials and finishes—everything from floors and ceilings to furniture and structural elements—in the belief that wood environments have a positive impact on students.
| Aug 11, 2010
Nurturing the Community
The best seat in the house at the new Seahawks Stadium in Seattle isn't on the 50-yard line. It's in the southeast corner, at the very top of the upper bowl. "From there you have a corner-to-corner view of the field and an inspiring grasp of the surrounding city," says Kelly Kerns, project leader with architect/engineer Ellerbe Becket, Kansas City, Mo.
| Aug 11, 2010
Two Rivers Marketing: Industrial connection
It was supposed to be the perfect new office. In July 2003, Two Rivers Marketing Group of Des Moines, Iowa, began working with Shiffler Associates Architects on a 14,000-sf building to house their rapidly growing marketing firm. Over the next six months they put together an innovative program that drew on unprecedented amounts of employee feedback.
