US construction trends and outlook (Q1 2015) - JLL

Construction costs will remain high despite the decline in oil prices.

United States Construction Perspective Q1 2015

In late 2014, oil prices experienced significant declines due to oversaturated supply and a slowdown in global demand. Prices have since stabilized but at depressed levels. Materials prices were projected to drop in correlation with oil, but high demand for most major construction inputs has kept prices up overall. Low gas prices typically drive an uptick in demand for retail, e-commerce, and industrial real estate. However, shipping costs remain high due to a decline in available labor, negating much of the oil price savings. In the office market, the development pipeline continues to expand alongside rents, which increased 3.1 percent this quarter. U.S. markets are set to deliver more than 80 million square feet currently under development. Energy-heavy markets such as Houston are exceptions to this trend, as declining demand stifles the need for new space.

We expect strong demand for most property types and costly construction labor will counter any price relief low oil prices has on materials for the foreseeable future.

National economic trends

Crude oil is selling for half of its June 2014 value, as an oversupply of crude hits the market. ($ per barrel)

Crude Spot Price, Cushing OK

$120 $100

-52.2%

$80 $60 $40 $20 $0

April

March

February

January

December

November

October

September

August

July

Source: JLL Research, U.S. Energy Information Administration 4

GDP growth slowed in 2015, despite positive expectations from economists. 10.0%

Overall real GDP growth Construction component growth

0.2%

Overall GDP growth in Q1 2015, far below expectations.

(Q-o-Q change)

5.0%

0.0%

-5.0%

Construction GDP has increased more quickly than overall GDP since 2012.

-10.0%

-15.0%

Source: JLL Research, Bureau of Economic Activity 5

The steady expansion in construction employment since 2012 comes to an end as labor force participation declines.

Construction employment (number of employees)

Construction Overall Employment

6400

144000

Overall employment (number of employees)

6600

Both construction unemployment and overall unemployment have seen approximately 0.0 percent growth in 2015, as labor participation rates continue to decline.

142000 140000

6200

138000

6000

136000

5800

134000

5600

132000 130000

5400

128000 5200

126000

5000

124000

4800

122000 2010

2011

2012

2013

2014

2015

Source: JLL Research, Bureau of Labor Statistics 6

Construction unemployment rates rose in early Q1 2015, resting above Q4 2014 totals. This could be due to an extreme winter, which caused a break in construction activity

(%) 30.0

5.6%

Construction Overall

25.0

Overall unemployment rate March 2015

20.0

9.5% Construction unemployment rate March 2015

15.0

10.0

5.0

0.0 2008

2009

2010

2011

2012

2013

2014

2015

Source: JLL Research, Bureau of Labor Statistics 7

The Architecture Billings Index began to grow again in March, as more projects enter the design phase in spring 2015. The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 11 months 60 55 50 45 40 35

ABI was 51.7 in March, as the ABI rebounds from early 2015 declines.

30 25

20 Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge 8

The Construction Backlog Index dipped slightly in Q4 2014.

CBI

CBI

Despite this decline, CBI rests 4.4 percent higher than Q4 2013, meaning 2015 will be another strong year for construction starts.

1.3%

0.1% q-o-q.

q-o-q.

CBI

-21.2%

This decline can be attributed to issues in West Coast ports, related economic uncertainty, and a sharp decline in public construction.

CBI

q-o-q.

3.5% q-o-q.

8.7

mos

National average construction backlog

Source: JLL Research, Associated Builders and Contractors 9

Cost trends: Labor and materials

The value of nonresidential construction is rebounding since 2011 lows, as demand for new construction grows. ($M)

Value construction put-in-place February y-o-y

$450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000

$100,000 $50,000 $0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014r

2015r

Source: JLL Research, U.S. Census 11

Construction spend in most major sectors is increasing, though healthcare spend continues to decline. Total spend Q1 2015

Percent change year-over-year

Education

$74.7 billion

4.6 percent

Manufacturing

$60.9 billion

37.9 percent

Commercial

$59.7 billion

13.5 percent

Office

$48.9 billion

13.5 percent

Healthcare

$37.3 billion

- 4.1 percent*

Amusement/Recreation

$18.3 billion

22.5 percent

* Decline due to decrease in public sector spending, increase in hospital consolidations, and more hospital closings Source: JLL Research, U.S. Census 12

Construction costs are continuing to grow, despite the slowdown in energy prices. The continued growth of labor costs in most major markets enhances overall construction cost 30000 Nat'l CCI Materials Index Labor Index

10000

25000

8000

20000

6000

15000

4000

10000

2000

5000

0

Common labor index: Union wage plus fringe benefits

CCI: 20-city average of common labor rates plus material inputs

12000

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: JLL Research, ENR 13

Costs have increased in all major markets, with the biggest cost growth in San Francisco: 6.0 percent year-over-year. RLB Comparative Cost Index tracks the bid cost of construction, including: labor, materials, contractor, and overhead costs.

Cost of construction in major markets 25000

2014 2015

20000

15000

10000

5000

0 Boston

Chicago

Denver

Los Angeles New York

Phoenix

Portland

San Francisco

Seattle

Washington, DC

Source: JLL Research, RLB 14

Want to save money on construction costs? Build in the South. Cities with more land availability and lower labor costs maintain lower overall prices 40000

ENR labor cost index by city

35000

Common Labor Index

30000 25000 20000

Labor expenditures are driving the growth in construction costs: Dallas, New Orleans, and Atlanta have the lowest labor costs, as well as the lowest cost overall.

15000 10000 5000 0

The Common Labor Index is the labor component of ENR’s Construction Cost Index and tracks the union wage, plus fringe benefits, for laborers. Source: JLL Research, ENR 15

Material Price Index indicates continued growth in costs… Materials Index

3500

Weighted price movement of steel, cement, and lumber

3300

3100 2900 2700

Materials costs grew just 1.5% from 2014 and 2015.

2500 2300 2100 1900 1700 1500 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

ENR Materials Price Index tracks weight price movement of structural steel, portland cement, and 2x4 lumber. Source: JLL Research, ENR 16

… with some notable exceptions, driven by a range of external factors. Material

March prices: percent change Y-o-Y

Aluminum Sheet

-1.1%

Asphalt Paving

1.5%

Cement

1.5%

Concrete Block

4.8%

Copper Pipe

-9.9%

Diesel Fuel

-40.7%

Fabricated Steel

1.1%

Gypsum Board

22.6%

Lumber/Softwood

4.0%

Plywood

2.1%

PVC Water Pipe

2.8%

Ready-Mix Concrete

-0.2%

Sheet Metal

2.2%

• Overproduction of copper and steel has created a glut on the market, with supply outstripping demand, driving down price growth. • Cement is posting historically high price increases, thanks to increasing demand. • Plywood and gypsum wallboard are also growing, as demand for these materials grows. This demand expansion is due to job market growth, consumer confidence, and an increase in construction projects.

-0.4% price decline in March 2015

Source: JLL Research, ENR 17

Decline in diesel fuel cost will not decrease the overall value of construction, but some sectors will contract as a result. Annual percent change in diesel fuel prices: Monthly 2014-2015 July

August

September

October

November

December

January

February

0.0%

-5.0%

10% Projected increase of construction put in place value, despite downturn in prices.

-10.0% -15.0%

-20.0% -25.0% -30.0%

Energy price declines will disproportionately affect manufacturing: the sector may decline 25 percent over the next year.

-35.0% -40.0% -45.0% Source: JLL Research, ENR 18

Construction starts and put-in- place

Q1 2015 office starts are down from Q1 2014, though still well above 2012 levels, indicating demand for new stock is still high. Q1 2012

11.6 m.s.f.

Q1 2013

Q1 2014

Q1 2015

13.4 m.s.f.

22.2 m.s.f.

20.8 m.s.f.

Source: JLL Research, CoStar, McGraw Hill 20

Office vacancy rates held steady in Q1, but will decline in 2015 as corporate expansions absorb space. Office vacancy rates

17.5%

17.0% Vacancy in Q1 2015 sat at 15.6 percent, should drop to below 15.0 percent by end of year.

16.5%

16.0%

15.5%

15.0%

14.5% Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Source: JLL Research 21

The dollar value of construction put-in-place has declined in Q1 2015, though it is still substantially higher than pre-recession lows. ($M)

450,000

Value of construction put-in-place

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000

Source: JLL Research, Census Bureau 22

Office and industrial construction continue to rise, despite oil prices slowing the building surge in Houston. Office construction

Industrial construction

Q1 2015

Q1 2014

22.2 m.s.f. under construction

Q1 2014

86.8

Q1 2014

m.s.f. under construction


Q1 2015

157.7 m.s.f under construction

Retail construction Q1 2015 Q1 2014



Source: JLL Research, CoStar Group 23

Office completions in 2015 are twice the amount of Q1 2014, as 2014’s starts are delivered to the market. 140,000,000

Annual completions (s.f.)

120,000,000

100,000,000

80,000,000

Q1 2015 Completion totals: 8.7 m.s.f. vs.

60,000,000

Q1 2014: 4.3

m.s.f.

40,000,000

20,000,000

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 Q12015


The amount of vacant sublease space nationally has declined, as firms begin scooping up empty, prime subleases. 100,000,000

Despite the decline nationally, energy-rich markets have seen a huge jump in sublease space available. Houston has seen 3.0 M.S.F. of new sublease space enter the market since January 2015.

Sublease space (s.f.)

90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 2009

2010

2011

2012

2013

2014

2015


Houston’s office rents dipped slightly as crude oil prices tanked, though still rest above 2013 rates. Houston Class A Office Rent vs. WTI spot price by Quarter WTI Spot Market Crude Oil Price ($/bbl) $140.00

Houston Office Market Avg. Rental Rates ($/SF/YR Class A)

$40.00

WTI Spot Price

$35.00

$100.00 $80.00

$30.00 $60.00 $40.00

Houston average $/s.f. rent

$120.00

$25.00

$20.00 $0.00

$20.00 YE 2015 YTD 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013 Q1 2013 Q4 2012 Q3 2012 Q2 2012 Q1 2012 Q4 2011 Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010 Q2 2010 Q1 2010 Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008 Q3 2008 Q2 2008 Q1 2008


Portland, Seattle, and Washington DC have the most uniform and lowest office construction costs of all markets. Range of office construction costs in major markets

($ p.s.f.) $400

$350 $300 $250 $200 $150 $100

Phoenix has the lowest construction cost thanks to available land and low-cost labor.

$50

$0 Boston

Chicago

Denver

Los Angeles

New York

Phoenix

Portland

San Francisco

Seattle Washington DC

Source: JLL Research, Rider Levett Bucknell 27

Office construction is seeing rapid growth nationally, particularly in the Southeast and Northwest, while it has slowed in Houston and the Northeast. 6.91 M.S.F. Seattle 5.08 M.S.F Boston

2.07 M.S.F. Portland

7.2 M.S.F New York Philadelphi City 3.84 M.S.F.

3.13 M.S.F. Chicago

3.13 M.S.F San Francisco

a

2.13 M.S.F. DC

2.34 M.S.F. Denver 1.62 M.S.F. San Diego

3.66 M.S.F. Phoenix

1.62 M.S.F. Atlanta

7.14 M.S.F. Dallas

1.57 M.S.F. Charlotte

The dollar value for construction starts in Georgia is up 13 percent.

12.59 M.S.F. Houston

Q1 2015 under construction Source: JLL Research 28

Industrial completions in Q1 2015 grew 27 percent from Q4 2014. (s.f)

450,000,000 400,000,000

Annual completions

350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Q1 2015

Source: JLL Research, CoStar 29

Consumer confidence is increasing as oil prices decline, spurring firms to invest in growing warehouse and e-commerce space.. ($B)

U.S. total warehouse construction put-in-place

$20

$18 $16 $14

2.5 points Consumer Confidence Index

$12 $10 $8 $6 $4 $2 $0

Source: JLL Research, US Census 30

Industrial construction costs remain lower than office. Highest cost stock is in Los Angeles and San Francisco, mainly due to land and labor costs ($ p.s.f.)

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

Denver

Los Angeles

New York

Phoenix

Portland

San Francisco


Source: JLL Research, Rider Levett Bucknell 31

Industrial square footage under construction is growing in the South, Northeast, and West, and slowing in the Midwest. 3.8 M.S.F. Seattle

13.3

3.3 M.S.F. East Bay

M.S.F. Philadelphia

8.7 M.S.F. Chicago 3.8 M.S.F. Indianapolis

3.6 M.S.F. Los Angeles

20.1 M.S.F. Inland Empire

2.6 M.S.F. Phoenix

Inland Empire under construction increased 50% since Q4 2014.

3.2 M.SF. Central NJ

1.8 M.S.F. Baltimore 3.1 M.S.F. Charlotte

13.9 M.S.F. Dallas

18.9 M.S.F. Atlanta

6.3 M.S.F. Houston Q1 2015 under construction


Retail deliveries are down, as consumer activity floundered in the colder months; increased consumer confidence in the spring will spur development. Historical Retail Deliveries

Annual completions (s.f.)

300,000,000

250,000,000

200,000,000

150,000,000

Starts are down, from 12.5 MSF delivered in Q1 2014 to 9.5 MSF in Q1 2015.

100,000,000

50,000,000

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 Q1 2015

Source: JLL Research, CoStar 33

Despite lower oil prices a shortage in trucker employment keeps delivery costs high. Wages and employment in trucking industry $23

1,500 Wages

$23

Employment

Average hourly wage

$22 1,400

$22 $21

1,350

$21

Thousands of Employees

1,450

1,300

$20 $20

1,250

$19

1,200

$19 $18

1,150 2007

2008

2009

2010

2011

2012

2013

2014


San Francisco and Los Angeles have the highest-price prime retail construction cost; Denver remains the lowest cost. Range of retail construction costs in major markets

($ p.s.f.) $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 Boston

Chicago

Denver

Los Angeles

New York

Phoenix

Portland

San Francisco



Significant retail square footage is under construction in the South, Northeast, and Southern California markets. 0.3 M.S.F. Seattle 1.6 M.S.F. Boston 0.3 M.S.F. San Francisco 1.6 M.S.F. Los Angeles

2.1 M.S.F. Chicago

0.7 M.S.F. Denver

1.0 M.S.F. Orange County

Retail demand will increase as consumer confidence grows across 2015.

0.7 M.S.F.

Philadelphia

1.0 M.S.F. New York City

1.2 M.S.F. DC

0.5 M.S.F. Atlanta

3.5 M.S.F. Dallas 1.7

M.S.F.

Houston

0.62 M.S.F. Tampa

Q1 2015 under construction Source: JLL Research 36

Overview and outlook

Key construction markets 1.

Houston construction will grind to a halt. Sublease vacancy is high and this is creating opportunities for firms to move into new, premium space. Construction starts declined in this quarter.

2.

San Francisco’s office market is growing and expensive. Vacancy rates have declined almost 1.0 percent since Q4 2014 as demand for trophy space skyrockets. At the same time, San Francisco has seen the largest growth in construction costs across Q1.

3.

The Southeast remains a strong market for construction. Markets boast a large amount of available land, along with relatively cheap labor costs in most states. Charlotte office starts were up from 379,587 square feet in 2014 to 1.6 million square feet in Q1 2015 as companies cash in on the region’s growth.

4.

New York City remains the most expensive market, driven by high labor costs and demand.

5.

Retail starts are up in Seattle, as they remain stagnant across the rest of the country. Retail companies are optimistic that 2015 will see more growth, thanks to increased consumer confidence.


What’s next for construction? 1.

Construction costs continue to grow, even as starts begin to slow across most major markets.

2.

Though materials costs are rising overall, supply gluts will drive down prices of major commodities, including copper and steel. The high cost of concrete will continue to balance out this decline.

3.

Demand from downstream markets will remain strong, despite the dropping oil prices. Corporate profits are projected to increase 2.6 percent annually to 2020, bolstering demand for new construction.

4.

In some markets, replacement costs are lower than purchase prices, meaning constructing new space is more cost-effective than renting existing space.

5.

Higher consumer spending, as a result of declining oil prices, increasing employment, and growing consumer confidence, will bolster retail and e-commerce demand, which will lead to increased construction demand in these sectors. The construction industry usually lags overall economic recovery by one to two years; the industry is still in the early stages of its recovery and will continue to grow in response to overall economic growth.

Source: JLL Research, IBISWorld 39

Dana Westgren Research Analyst- Industry, Project and Development Services tel +1 312-228-2867 [email protected]

Thank you

© Copyright 2015 Jones Lang LaSalle