by Brianna Crandall — April 1, 2016—The copious growth of the construction industry in 2015 is fueling continued strong activity in 2016. According to professional services and investment management firm JLL’s latest report on nonresidential construction activity, the rate of growth in construction is slowing — yet starts continue at a strong pace.
The catch: growth is expensive, says JLL. While a welcome decline in prices for steel and some other materials is underway, high labor costs, glass prices and steep competition throughout the industry continue to prove challenging.
JLL found that materials prices have seen steep declines, especially steel, and these declines are expected to continue in 2016.
Todd Burns, president of Project and Development Services at JLL Americas, explains:
For financial viability, project sponsors will need to strike a balance between the lower costs for some materials, like steel, and the ever-increasing cost of glass and labor. Location continues to be a key driver in finding success throughout various industry sectors. With a slowed growth in construction, executives need to think strategically in terms of where they will invest.
Key markets to watch:
- San Francisco / Silicon Valley: The cradle of the U.S. high-tech industry continues to be among the most costly markets for construction, motivating some technology companies to look to other tech-engaged cities — such as Chicago and Austin — for new development.
- Southeast: With low labor and land costs, cities like Charleston, Atlanta and Charlotte are seeing an influx in population as companies develop new manufacturing and office facilities. In the fourth quarter (Q4) of 2015, Atlanta led U.S. industrial construction with 19.6 million square feet under development.
- Houston: Office construction dropped by 41.7 percent in Q4 2015 as oil prices dropped and sublease availability skyrocketed. Enterprising companies will pursue opportunities to relocate to newly affordable office spaces with significant amenities, using the capital saved to invest in modern workplace designs and customized space.
Dana Westgren, research analyst with Project and Development Services at JLL Americas, concluded:
The construction industry is naturally cyclical and mirrors the effects of the stagnating global economy. The most successful projects in 2016 and beyond will find a middle ground that offsets labor shortages and rapidly increasing glass prices with lower costs of steel and other construction materials caused by a low demand overseas.
Key sectors to watch:
- Education: In 2015, education sector construction activity grew by more than 12 percent year over year, in terms of project value. In 2016, schools and universities are expected to continue investment in new facilities to capture student spending on campus, developing multi-function laboratories, expanded mixed-use areas and more collaborative spaces on campus.
- Industrial: Industrial construction grew by more than 22 percent year over year, in terms of value, to reach $84.1 million. Project deliveries in this sector also grew year over year, with 178.4 million square feet delivered in 2015. Industrial project starts will likely increase in 2016, given high demand and a lack of available space.
- Commercial: Renovation will continue apace not just in office buildings, but also in retail and industrial facilities, as companies re-envision their stores and distribution centers to accommodate new technologies and the omnichannel shopping experience.
A push for new build-outs in the retail sector is expected to continue throughout 2016, as developers reinvent existing space to engage consumers in unique ways and combine brick-and-mortar locations with online stores.
Aaron Spiess, executive vice president and managing director of Project and Development Services at JLL Americas, commented:
We have never seen a greater sense of urgency from retailers to address their stores’ role in delivering a “True Omni Branded Experience” for consumers. The pressure of emerging digital experiences and platforms has escalated the need to exceed consumer expectations of the store. With the continuous advent of new e-commerce capabilities, this is a trend we expect to continue.
The complete United States Construction Perspective – Q4 2015 report is available for free download from JLL after filling out a brief form.
The highly ranked JLL Project Management business provides development, design and construction of commercial real estate projects for the world’s most prominent corporations, educational institutions, public jurisdictions, healthcare organizations, retailers, banks, hotels and real estate owners. The team comprises 3,200 project managers across 49 countries worldwide, and is actively managing $25.6 billion under construction.
Fortune 500 company JLL offers specialized real estate services for a property portfolio of 4.0 billion square feet through more than 230 corporate offices in more than 80 countries, with a global workforce of more than 60,000.
