Leasing momentum boosting construction demand, but costs growing

Transcription

1 Leasing momentum boosting construction demand, but costs growing United States Construction Perspective Q4 2014

2 Construction starts increased in 2014, driven by improved demand from the office and industrial sectors in energy producing markets, along with traditional office markets like New York City. Even as demand explodes, cost to build is higher than ever, thanks to the continued inflation of labor and materials costs. Due to the recent decline in energy costs, construction will shrink in Texas, a reversal from 2014 trends. Interest rates are also projected to grow, creating a potential dip in construction activity. Still, this growth cycle should last another two to three years.

3 Did you know? U.S. construction metrics The construction industry has grown every month of 2014, gaining 48,000 jobs in December to reach 290,000 total in However, overall construction unemployment is still 1.5 million lower than the peak in $982.0B Total construction spending in December 2014, up 2.2 percent from December $64.9B 22.0% Spent in wages in Commercial Building in 2014, approximately 48.0 percent of total revenue. Wages have continued to increase across the construction industry, forcing up overall building costs. The industry average is approximately $42,000. The construction industry remains 22.0 percent below peak levels. According to Gilbane, it may take seven to eight more years to retain previous levels M Total nonresidential building completions exploded in Q2 2014, as million square feet of new space was completed, mostly in the industrial sector. 2.0% Cost for material inputs in all construction in the last 12 months. Cost for materials for non-residential construction increased 1.4 percent during that time. Prices are projected to continued growth, though many inputs will decline in price after Sources: JLL Research, Gilbane, Bureau of Labor Statistics, IBISWorld 3

4 National economic trends

5 Construction GDP is rebounding more quickly than overall GDP Construction starts on backlogged projects across the United States spur sector growth 10.0% Overall real GDP growth Construction component growth 5.0% 0.0% -5.0% Construction GDP has increased more quickly than overall GDP since % 2.6% Overall GDP growth in Q % Source: JLL Research, Bureau of Labor Statistics 5

6 Construction employment is growing faster than overall employment (percent chg. year-over-year) 10.0% 233k Construction jobs added in % 0.0% -5.0% -10.0% However, overall productivity has declined, despite the growth in construction employment, as many new workers are under-trained for construction jobs. Percent increase in construction jobs back to pre-recession levels % Non-farm employment Construction employment Source: JLL Research, Bureau of Labor Statistics 6

7 Construction employment was disproportionately affected by the recession Thanks to a rebound in construction opportunities, construction unemployment should drop below overall unemployment by 2017; this decline is partially due to a reduction in available construction workers in the workforce. 25.0% 20.0% 15.0% 8.3% Construction unemployment rate December % 5.0% 0.0% 5.6% Overall unemployment rate December Source: JLL Research, Bureau of Labor Statistics 7

8 The Architectural Billings Index, a leading indicator, has started to increase This indicates an aggregate jump in construction activity ABI has reached more than the baseline, 50, indicating a rebound in billing. The ABI reports on the change in billings from the previous month Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge 8

9 The Construction Backlog Index is growing Due to the rebound of construction activity in communities previously stagnated by the financial crisis; the South is behind in construction, but is positioned to expand CBI 6.93mos CBI 10.2mos CBI 9.42mos CBI 8.98mos 8.88mos Arrows represent change from one year ago National average construction backlog Source: JLL Research, Associated Builders and Contractors 9

10 Cost trends: Labor and materials

11 Overall construction spending increased each quarter in 2014, driven by nonresidential spending. This trend is expected to continue in 2015 (Percent chg. year- over- year) 25.0% Nonresidential construction spending 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% Source: JLL Research, Gilbane 11

12 Education construction is approximated to have had the highest overall spend in Total spend Percent change year-over-year Education $77.7 billion 3.9 percent Healthcare $38.7 billion percent* Commercial $60.1 billion 10.7 percent Office $48.6 billion 17.6 percent Manufacturing $60.9 billion 18.1 percent * Decline due to decrease in public sector spending Source: JLL Research, U.S. Census 12

13 Labor costs are leading the growth in construction cost. A decline in available construction workers in the workforce, due to a lack of job training and general frustration with the market, leads to an increase in costs. CCI: 20-city average of common labor rates plus material inputs Nat'l CCI Materials Cost Labor Cost Common labor index: Union wage plus fringe benefits Source: JLL Research, ENR, Gilbane 13

14 New York City, Chicago, and Minneapolis lead the pack in terms of high-cost construction. Cities with more land availability and lower labor costs maintain lower overall prices Highest Cost New York City Chicago Minneapolis (Large spike in cost in 2014) Boston Los Angeles Philadelphia San Francisco Seattle Dallas (Has not grown significantly) Denver, CO Atlanta (Increase for the first time in 2014 since 2008) Pittsburgh Lowest Cost Source: JLL Research, ENR 14

15 Union cities, such as New York, San Francisco, and Boston, have higher labor cost than their right to work counterparts $90.0 Construction Costs- Major Cities $80.0 $70.0 $60.0 National average: $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 Atlanta Baltimore Boston Chicago Cleveland Dallas Denver Detroit Los Angeles Minneapolis New Orleans New York Philadelphia Pittsburgh San Francisco Seattle Saint Louis Source: JLL Research, ENR 15

16 Material price index shows high prices remain, though cost growth slows Weighted price movement of steel, cement, and lumber Closer inspection of the Materials Cost Index (ENR) shows a recent history of growth. Economists project a slight decline in materials cost after ENR Materials Price Index tracks weight price movement of structural steel, portland cement, and 2x4 lumber. Source: JLL Research, ENR 16

17 Steel and rebar costs will decline after 2015 Due to import pressures and decline in housing starts, lowering overall materials costs 8.0% 6.0% 4.0% 2.0% Steel Rebar Gypsum Plywood Softwood Lumber 0.0% -2.0% % Change 2014 % Change 2015 % Change % -6.0% Steel prices are forecast to decline 0.9 percent in 2014 and 1.8 percent decline forecast through % Source: JLL Research, ENR 17

18 Cities with high labor costs and land constraints have high replacement costs versus rental price. Moving into 2015, this could hamper construction growth in some markets $1,200.0 $ per Replacement Cost $1,000.0 $800.0 $600.0 $400.0 $200.0 $0.0 Source: JLL Research 18

19 Construction starts and put-in place

20 2014 saw a spike in demand for both new and remodeled space. Nonresidential construction starts are growing as vacancy declines k k 190k 208k Nonresidential construction starts are increasing as vacancy levels decrease. For industrial properties, vacancy has declined from 8.9 percent in 2012 to 7.2 percent in Q Office vacancy rates dropped from 14.1 percent to 10.9 percent in that same time. Nonresidential starts flattened slightly in Q4 2014, but will see an upturn again in Source: JLL Research, CoStar, McGraw Hill 20

21 The value of U.S. private construction put-in-place has grown. Due to an increase in new, trophy office development ($M) $450,000.0 $400,000.0 $350,000.0 $300,000.0 $250,000.0 $200,000.0 $150,000.0 $100,000.0 $50,000.0 $277.0 billion Value of public construction in November 2014 $975.0 billion Total Construction put-in-place in November Approximately 1/3 of this was nonresidential spending. $ Source: JLL Research, Moody s Analytics, Census Bureau 21

22 Demand for office and industrial space has increased, impacting the construction starts in these sectors. Office construction Industrial construction According to a JLL/CoreNet survey: 72% of businesses plan to increase space density through 2016 Leading organizations pushing density to 150 per person or less Q Q m. under construction Retail construction Q m.s.f. under construction Q m. under construction 77.8 m.s.f under construction Q m. under construction Q m. under construction Source: JLL Research, CoStar Group 22

23 Office completions are on the rise, after bottoming out in 2012, driven by demand from the energy sector. 140,000, ,000,000 Annual completions () 100,000,000 80,000,000 60,000,000 40,000,000 20,000, Source: JLL Research 23

24 Prime office costs have grown across the board Demand increases for high-class, CBD buildings, and input costs spike ($ p.) $400.0 $350.0 $300.0 Range of office construction costs in major markets San Francisco s cost of building increased the most for both low and high cost office space since $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 Boston Chicago Los Angeles New York San Francisco Washington DC Source: JLL Research, Rider Levett Bucknell 24

25 Office square feet under construction grew across the country in Growth in the energy sector fueled construction 4,153,534 s.f Seattle 438,935 s.f Portland 5,847,556 s.f San Francisco 1,039,772 s.f San Diego 2,404,819 Phoenix 1,860,932 Denver 6,487,023 Dallas 4,189,935 Chicago 3,506,297 Philadelphia 379,587 Charlotte 5,369,595 Boston 8,425,911 New York City 5,928,933 DC 17,760,993 Houston Source: JLL Research 25

26 Thanks to the energy market boom, Houston became the hub of office construction in However, as oil prices decline and energy companies curb spending, construction activity will slow. Vacancy Q4 2014: 10.8% 51% Energy tenants occupying top-tier CBD market Starts Q4 2014: 2.1 m. Under construction End of 2014: 16.0 m. Of the over 16.0 m. of office space currently under construction, 44.0 percent still un-leased, slowing development. 20% Construction volumes in Texas projected 2015 Source: JLL Research 26

27 Industrial completions are continuing to grow at a high rate, eclipsing 2013 totals. 300,000,000 Annual completions (s.f) 250,000, ,000, ,000, ,000,000 50,000, Source: JLL Research, CoStar 27

28 The development of e-commerce and large scale development are driving industrial demand growth. e-commerce has been the fastest-growing segment of the retail market, creating a need for new types of industrial development These buildings need more office space and parking, as they need to house more onsite employees than traditional industrial buildings The guts of these buildings need more automation- there will be increased demand for build outs of existing space to fit these parameters Companies are working to enhance economies of scale post-recession, are developing larger industrial spaces that can serve multiple markets Consolidation of services into one large warehouse key to industrial development More large-scale construction projects to come due to this trend Source: JLL Research, Urban Land Institute 28

29 Industrial construction costs remain lower than office. Highest cost stock in Los Angeles and San Francisco ($ p.) Range of warehouse construction costs in major markets $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 Boston Chicago Los Angeles New York San Francisco Seattle Washington DC Source: JLL Research, Rider Levett Bucknell 29

30 Industrial centers like Inland Empire saw an increase in square footage under construction in ,932,970 Seattle 2,866,426 Los Angeles 13,090,582 Inland Empire 17,517,455 Dallas 13,393,047 Chicago 7,273,541 s.f Indianapolis 12,395,607 Atlanta 12,639,496 Philadelphia 2,234,134 Charlotte 1,745,130 Baltimore 220,000 Boston 895,646 Northern NJ 65,000 Long Island 4,794,068 Houston Source: JLL Research 30

31 Demand for large retail space declines due to an increase in digital retail. 300,000, ,000,000 Though overall retail construction has declined, outlet mall demand has skyrocketed. As a result, between 2013 and 2016, 21 million square feet outlet space will have been delivered. Annual completions (s.f) 200,000, ,000, ,000,000 50,000, Source: JLL Research, Rider Levett Bucknell 31

32 Overall retail construction slows, but demand for outlet space flourishes. Between 2013 and 2016, it is estimated that 21 million square feet of outlet center space will have been delivered Consumers are motivated by discounts on name brand products Outlet development will continue to penetrate new markets as various submarkets begin to emerge from the recession As a percentage of all space, malls and specialty centers are the most active in current construction activity Retail is a rising market in many U.S. markets, with Miami and Dallas leading the packindicating more development in these markets is to come Due to lifestyle changes, as more people move to urban core settings, mixed use retail is becoming a more integral part of retail development Source: JLL Research 32

33 Retail construction costs remain low in Denver, and have reached new post-recession heights in Los Angeles and San Francisco. ($ p.) Range of retail construction costs in major markets $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 Boston Chicago Denver Los Angeles New York San Francisco Seattle Washington DC Source: JLL Research 33

34 Major markets like New York City saw moderate retail square footage under construction in ,432 Seattle 2,801,056 Boston 83,635 San Francisco 1,690,835 Los Angeles 991,111 Orange County 3,652,781 Dallas 1,534,800 Chicago 385,058 Atlanta 762,131 Philadelphia 895,404 New York City 1,894,008 DC 352,250 Hawaii 2,355,126 Houston 427,148 Tampa Source: JLL Research 34

35 JLL construction and renovation projects are following the market demands for hospitality, education, technology, and entertainment. Lyft San Francisco, CA 65,493 Beverly Hills Hotel Beverly Hills, CA 75,000 AMC Theaters Nationwide 4.8 m.s. f. Roosevelt University Chicago, IL 414,000 Source: JLL Research 35

36 Overview and outlook

37 Key construction markets in New York City and Northern New Jersey continue to develop. Part of this is due to post-sandy redevelopment, along with a general increase in demand for real estate space. Industrial stock may continue to grow as a result of increased traffic due to the Panama Canal expansion. The Southeast is catching up to overall trends. This region holds the largest concentration of commercial building establishments and had an approximately 16.0 percent increase in construction starts. Replacement costs are low in places like Chicago, West LA, and Seattle indicate future building growth potential in those markets. Previously slower moving markets, such as Minneapolis, have seen an increase in construction starts. Costs for building jumped in 2014 in Minneapolis, as the city works on a massive downtown refurbishment. Midsized markets are seeing a jump in construction activity, leading to cost growth. Houston led in office development, but this may stagnate in It delivered 5.4 million square feet of new space by the end of 2014; however prices are increasing, and the decline in oil prices imply a future decline in construction in Houston. Source: JLL Research 37

38 What s next for construction? Construction costs are growing, though growth in materials cost will drop during Construction unemployment rates remain high, indicating a large potential employment pool for new construction. Unemployment will drop quickly as building continues to grow; it is projected 1.1 million jobs will be added in construction by Construction put-in-place has continued to grow since bottoming-out in 2009/2010. Office construction in the energy sector may see a decline in 2015, as oil prices have dropped substantially. In some markets, replacement costs are lower than purchase prices, meaning constructing new space is more cost-effective than renting existing space. 5. Construction Backlog Index is high in all but the Southeast Region, indicating 2015 will be a big year for construction. Construction is in the mature phase of the industry life cycle, meaning markets are volatile and advancements in techniques and materials have little impact on demand. Source: JLL Research, IBISWorld 38

39 Dana Westgren Research Analyst- Industry, Project and Development Services tel Thank you Copyright 2015 Jones Lang LaSalle