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
Multifamily Housing | Dec 7, 2022
Canada’s largest net-zero carbon residential community to include affordable units
The newly unveiled design for Canada’s largest net-zero carbon residential community includes two towers that will create a new destination within Ottawa and form a striking gateway into LeBreton Flats. The development will be transit-oriented, mixed-income, mixed-use, and include unprecedented sustainability targets. Dream LeBreton is a partnership between real estate companies Dream Asset Management, Dream Impact, and local non-profit MultiFaith Housing Initiative.
Student Housing | Dec 7, 2022
Cornell University builds massive student housing complex to accommodate planned enrollment growth
In Ithaca, N.Y., Cornell University has completed its North Campus Residential Expansion (NCRE) project. Designed by ikon.5 architects, the 776,000-sf project provides 1,200 beds for first-year students and 800 beds for sophomore students. The NCRE project aimed to accommodate the university’s planned growth in student enrollment while meeting its green infrastructure standards. Cornell University plans to achieve carbon neutrality by 2035.
Office Buildings | Dec 6, 2022
‘Chicago’s healthiest office tower’ achieves LEED Gold, WELL Platinum, and WiredScore Platinum
Goettsch Partners (GP) recently completed 320 South Canal, billed as “Chicago’s healthiest office tower,” according to the architecture firm. Located across the street from Chicago Union Station and close to major expressways, the 51-story tower totals 1,740,000 sf. It includes a conference center, fitness center, restaurant, to-go market, branch bank, and a cocktail lounge in an adjacent structure, as well as parking for 324 cars/electric vehicles and 114 bicycles.
Geothermal Technology | Dec 6, 2022
Google spinoff uses pay-as-you-go business model to spur growth in geothermal systems
Dandelion Energy is turning to a pay-as-you-go plan similar to rooftop solar panel leasing to help property owners afford geothermal heat pump systems.
Contractors | Dec 6, 2022
Slow payments cost the construction industry $208 billion in 2022
The cost of floating payments for wages and invoices represents $208 billion in excess cost to the construction industry, a 53% increase from 2021, according to a survey by Rabbet, a provider of construction finance software.
University Buildings | Dec 5, 2022
Florida Polytechnic University unveils its Applied Research Center, furthering its mission to provide STEM education
In Lakeland, Fla., located between Orlando and Tampa, Florida Polytechnic University unveiled its new Applied Research Center (ARC). Designed by HOK and built by Skanska, the 90,000-sf academic building houses research and teaching laboratories, student design spaces, conference rooms, and faculty offices—furthering the school’s science, technology, engineering, and mathematics (STEM) mission.
Giants 400 | Dec 1, 2022
Top 100 Office Building Core+Shell Contractors and CM Firms for 2022
Turner Construction, AECOM, Clayco, and Gilbane top the ranking of the nation's largest office building core+shell contractors and construction management (CM) firms for 2022, as reported in Building Design+Construction's 2022 Giants 400 Report.
Mass Timber | Dec 1, 2022
Cross laminated timber market forecast to more than triple by end of decade
Cross laminated timber (CLT) is gaining acceptance as an eco-friendly building material, a trend that will propel its growth through the end of the 2020s. The CLT market is projected to more than triple from $1.11 billion in 2021 to $3.72 billion by 2030, according to a report from Polaris Market Research.
Giants 400 | Dec 1, 2022
Top 40 Parking Structure Contractors + CM Firms for 2022
PCL Construction, Balfour Beatty, McCarthy Holdings, and Level 10 Construction top the ranking of the nation's largest parking structure contractors and construction management (CM) firms for 2022, as reported in Building Design+Construction's 2022 Giants 400 Report.
Contractors | Nov 30, 2022
Construction industry’s death rate hasn’t improved in 10 years
Fatal accidents in the construction industry have not improved over the past decade, “raising important questions about the effectiveness of OSHA and what it would take to save more lives,” according to an analysis by Construction Dive.