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
| Nov 29, 2010
Renovating for Sustainability
Motivated by the prospect of increased property values, reduced utility bills, and an interest in jumping on the sustainability bandwagon, a noted upturn in green building upgrades is helping designers and real estate developers stay busy while waiting for the economy to recover. In fact, many of the larger property management outfits have set up teams to undertake projects seeking LEED for Existing Buildings: Operations & Maintenance (LEED-EBOM, also referred to as LEED-EB), a certification by the U.S. Green Building Council.
| Nov 23, 2010
Honeywell's School Energy and Environment Survey: 68% of districts delayed or eliminated improvements because of economy
Results of Honeywell's second annual “School Energy and Environment Survey” reveal that almost 90% of school leaders see a direct link between the quality and performance of school facilities, and student achievement. However, districts face several obstacles when it comes to keeping their buildings up to date and well maintained. For example, 68% of school districts have either delayed or eliminated building improvements in response to the economic downturn.
| Nov 16, 2010
Brazil Olympics spurring green construction
Brazil's green building industry will expand in the coming years, spurred by construction of low-impact venues being built for the 2016 Olympics. The International Olympic Committee requires arenas built for the 2016 games in Rio de Janeiro meet international standards for low-carbon emissions and energy efficiency. This has boosted local interest in developing real estate with lower environmental impact than existing buildings. The timing couldn’t be better: the Brazilian government is just beginning its long-term infrastructure expansion program.
| Nov 16, 2010
Green building market grows 50% in two years; Green Outlook 2011 report
The U.S. green building market is up 50% from 2008 to 2010—from $42 billion to $55 billion-$71 billion, according to McGraw-Hill Construction's Green Outlook 2011: Green Trends Driving Growth report. Today, a third of all new nonresidential construction is green; in five years, nonresidential green building activity is expected to triple, representing $120 billion to $145 billion in new construction.
| Nov 16, 2010
Calculating office building performance? Yep, there’s an app for that
123 Zero build is a free tool for calculating the performance of a market-ready carbon-neutral office building design. The app estimates the discounted payback for constructing a zero emissions office building in any U.S. location, including the investment needed for photovoltaics to offset annual carbon emissions, payback calculations, estimated first costs for a highly energy efficient building, photovoltaic costs, discount rates, and user-specified fuel escalation rates.
| Nov 16, 2010
Where can your firm beat the recession? Try any of these 10 places
Wondering where condos and rental apartments will be needed? Where companies are looking to rent office space? Where people will need hotel rooms, retail stores, and restaurants? Newsweek compiled a list of the 10 American cities best situated for economic recovery. The cities fall into three basic groups: Texas, the New Silicon Valleys, and the Heartland Honeys. Welcome to the recovery.
| Nov 16, 2010
Landscape architecture challenges Andrés Duany’s Congress for New Urbanism
Andrés Duany, founder of the Congress for the New Urbanism, adopted the ideas, vision, and values of the early 20th Century landscape architects/planners John Nolen and Frederick Law Olmsted, Jr., to launch a movement that led to more than 300 new towns, regional plans, and community revitalization project commissions for his firm. However, now that there’s a societal buyer’s remorse about New Urbanism, Duany is coming up against a movement that sees landscape architecture—not architecture—as the design medium more capable of organizing the city and enhancing the urban experience.
| Nov 10, 2010
$700 million plan to restore the National Mall
The National Mall—known as America’s front yard—is being targeted for a massive rehab and restoration that could cost as much as $700 million (it’s estimated that the Mall has $400 million in deferred maintenance alone). A few of the proposed projects: refurbishing the Grant Memorial, replacing the Capitol Reflecting Pool with a smaller pool or fountain, reconstructing the Constitution Gardens lake and constructing a multipurpose visitor center, and replacing the Sylvan Theater near the Washington Monument with a new multipurpose facility.
