Construction Activity Is Still Growing – It Just Costs More Now

Last year was a banner year for post-recession construction activity – a tough act to follow into 2016, given mounting costs. While construction growth is expected to remain strong this year, its pace will be tempered compared with the record pace we saw in 2015, according to JLL’s latest report on U.S. non-residential construction.

Our research uncovered some key indicators of a stable-but-slow 2016, including a third-quarter decline in construction backlog across all regions except the South that, combined with an overall 8.5-month average construction backlog across the country, indicates an impending decline in activity. Also, the development companies surveyed in the report agree that activity will remain stable in 2016, with a chance of decline in second half of the year.

Why the expectation of slowing momentum? Increasingly, construction growth – and, in particular, the talent needed to achieve it – doesn’t come cheap.

Short on Talent, High on Wage Costs

Construction costs are hiking up across the board, mostly because of glass and labor shortages. While a decline in prices for steel has been welcome, sheet-glass prices have risen sharply, a direct blow to office and high-rise residential construction budgets.

Meanwhile, the challenge of finding skilled construction talent continues to escalate. A recent survey found that 86 percent of contractors have trouble filling hourly craft professional positions, with carpenter positions rated as most difficult to fill.

At the same time, construction employment grew by 4.2 percent in December, outpacing overall employment growth by 4.0 percent. And when good talent is hard to find, it is little wonder that labor costs are higher than they have been in a decade.

Despite these costs, there is ample opportunity for meaningful growth – when developers strike the right mix of market and sector.

Momentum by the Market: The South Surges Ahead in 2016

Of course, some markets will experience faster momentum than others, including the South, the new frontier in construction growth, as well as secondary tech markets.

Atlanta, Charlotte and Charleston show green lights ahead because of their attractive mix of low labor and land costs and an influx of new population spurred by the manufacturing and office boom. Atlanta, for its part, led U.S. industrial constriction in the fourth quarter, with 19.6 million square feet under development.

By contrast, primary office markets are experiencing slower growth, as high property costs are being compounded by spiking sheet-glass costs. San Francisco and Silicon Valley, for example, are seeing some prospective tech companies set their sights on secondary tech markets like Chicago and Austin.

Growth is also more sluggish in energy markets like Houston where drops in oil prices have taken a toll on office construction activity in the fourth quarter. This trend is expected to continue through 2016, although the cycle is anticipated to restart in 2017 when oil prices are expected to rise again.

Momentum by the Sector: Industrial Continues its Streak

Several key sectors will continue their appetite for construction through 2016, including:

  • Education: Last year, project value grew by more than 12 percent year-over-year in education construction. This year, value – and demand – are also expected to grow.
  • Industrial: The shining star in construction, thanks to consumer confidence, industrial development grew by more than 22 percent in 2015, reaching $84.1 million and delivering 178.4 million square feet. This trend is expected to continue, with demand to remain high and space to remain low.
  • Office: 2015 was a banner year for completions, with space under construction peaking at 92.8 million square feet. Now, for the first time since the recession, deliveries are outstripping starts, as the 22.34 million square feet started in 2014 enters the market. Still, office under construction remains stable in most markets aside from some markets in the Rust Belt and smaller East Coast locations.
  • Retail: Construction in the fourth quarter was up 26.3 percent year-over-year, fueled by rebounds in consumer spending. With urgency at an all-time high for retailers to optimize their stores’ role in the omnichannel experience, construction – especially space build-outs – should continue to grow in 2016, too.

Looking ahead, other factors will come into play in construction’s momentum through the year, including the upcoming election’s effect on consumer activity, rising interest rates and the unfolding saga of the talent shortage. Still, all signs point to relatively clear skies ahead in 2016 for steady growth in key markets across the United States.

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