Construction growth has become more tempered this year compared to the last few years, as many companies take a “proceed with caution” attitude to capital spending. Rising construction costs and global economic uncertainty have companies holding tight on capital budgets this year, according to JLL’s latest report on U.S. non-residential construction activity. Nonetheless, retail construction continues to shine, as do certain geographic markets.
Following two boom years, construction continued at a relatively steady pace during the first quarter of 2016 on projects that broke ground a year or two ago. While office construction starts have slowed, the real action lies in retail, where construction projects during the first quarter climbed 24.4 percent over a year ago.
The outlook for the remainder of the year holds strong, but economic headwinds mean that the growth will be steadier and more controlled when compared to recent history.
Economic uncertainty is part of what is tempering construction growth. China’s slowing economy and a drop in U.S. gross domestic product (GDP) in the first quarter of 2016 put many companies on edge. Adding to the tension is the uncertainty that surrounds a presidential election year, throwing into question any number of regulatory and economic initiatives.
Britain’s decision to leave the European Union adds another layer of fog to the economic outlook. While Brexit doesn’t impact U.S. construction activity directly, it has infused more uncertainty into the global economy, fueling anxieties about spending.
Retail Renovation Heats Up
U.S. consumer spending has been relatively healthy of late, but with more shopping activity moving online, retailers are eager to find new ways to draw customers into their physical stores. Much of the retail construction growth in Q1 2016 has come from renovation, rather than new deliveries, as retailers evolve to meet consumers’ ever-growing expectations for unified online and brick-and-mortar experiences.
Macy’s is just one of the many major brands giving their stores a facelift to provide customers a more exciting experience, such as transforming beauty counters into interactive spaces. A new federal tax break that enables most retailers to deduct 75 percent of their qualifying remodeling expenses has helped boost renovations as well.
While activity on both coasts of the U.S. remained flat in Q1 2016, Dallas earned the distinction as the hottest market for retail construction. Following on the heels of explosive population growth, Dallas saw construction activity during the first quarter spike 80 percent year-over-year.
Consumers’ growing e-commerce retail appetite has led to rising demand for industrial facility construction. Industrial activity was up nearly 13 percent in the first quarter, with 178 million square feet under construction, up from 157.7 million square feet a year prior.
Warm Fronts Taking Hold
Office building construction remains strong, up 20.2 percent year-over-year, but feet are starting to drag. Starts are down 33 percent nationwide, from 20.3 million during the first quarter of 2015 to 13.6 million this year.
Looking south, you see a different story. Nashville continues to be one of the hottest markets for office, industrial and retail construction. With office vacancies among the lowest nationwide, Nashville is experiencing bursting demand for an influx of new buildings. In its latest fiscal year, Nashville approved a record-setting $3.65 billion of building permits—topping the prior year’s record of $2.4 billion. More broadly, the South has a strong outlook for building activity: JLL’s Construction Backlog Indicator (CBI) sat at 11.2 months for the South during the fourth quarter of 2015, notably higher than the national average of 8.4 months.
Seeing Through the Fog
For now, the bright spots continue to lift construction employment, which was up 4.7 percent year-over-year during the first quarter. Major corporations are feeling pressure to renovate their aging trophy properties to more accurately reflect corporate image and attract the right talent. Dark economic clouds threaten to cool things down. However, with the construction industry lagging the global economy by a year or two, it’s unlikely we’ll see activity plateau until at least 2017.
Todd Burns is the President of the Project and Development Services for JLL. Todd has wide-ranging commercial real estate and construction experience, having held roles such as architect, owner, owners representative, general contractor and project manager.