Heading into 2014 With ‘Cautious Optimism’

By Dermot Roe

According to industry indicators, “cautious optimism” is the pervading sentiment among construction industry leaders in the fourth quarter of 2013. In August, the Dodge Momentum Index, which tracks projects in planning stages, surged 11.1 percent from the second quarter of 2013. Likewise, the American Institute of Architects Architecture Billings Index — based on inquiries for new projects and construction spending — reached 52.7 and regained momentum lost during the first quarter of 2013. The Construction Backlog Index also demonstrated steady improvement, rising to 8.2 months of contractor backlog.

This sentiment is mirrored by the recent Jones Lang LaSalle Construction Outlook, which identified the commercial construction sector as recovering from its dormant state in late 2009 as a reshaped, more diversified industry with less developer risk and revived capital funding. This recovery will continue into 2014, with four key trends helping — and hindering — construction growth:

• Financing is back: Echoing the healthy activity in construction spending, commercial lending conditions are improving, even while lending standards have remained stagnant. The low cost of capital and re-emergence of the CMBS market have both enabled increased liquidity and easier lending. New CMBS issuance totals $50.8 billion so far through the beginning of August 2013, twice the level achieved through the first eight months of 2012. According to the Federal Reserve Board’s Commercial Lending Sentiment survey, 47.8 percent more respondents reported higher demand for commercial real estate loans in the third quarter of 2013 compared to the second quarter. This dwarfs the 23.4 percent response seen this time last year, and represents the biggest improvement in demand in more than a decade.
• Construction costs on the rise: Construction costs are outpacing the recovery in most of the country. The booming single-family home sector has generated rising construction costs for the commercial sector as well, including driving up the cost of labor. According to Rider Levett Bucknall’s Construction Cost Index, which uses construction fees to derive a trend in overall construction costs, the cost of construction increased 3.6 percent in 2013. This compares to a 1.5 percent increase this time last year, and annual growth rates that barely eclipsed two percent in the last two years.
• Green is the new black: Environmentally sustainable features are viewed as table stakes by owners and developers, and attention to green building materials is considered a core competency. LEED v4 formally launched in November 2013 and introduced new changes to enhance green building standards. Major new provisions in LEED v4 include expanding property type-specific designations, weighing points more heavily on optimizing energy performance, and a new “cradle to cradle” component. The cradle to cradle provision seeks to ensure that products and resources used during construction are safe and designed for recycling or composting, and that the manufacturing process for construction materials manages its carbon footprint.
• Sandy, stimulus and PPPs shape revenue: Much-needed infrastructure updates and rebuilding in the wake of severe storms are driving construction recovery in many geographies. While infrastructure is clearly an issue facing the U.S., there are little funds available to states for new projects. As a result, public-private partnerships are emerging as a solution when public funding is limited. Natural disaster reconstruction remains “top of mind” for construction executives on the one-year anniversary of Superstorm Sandy, as climate analysts predict more frequent volatile storms in the future.

The commercial construction industry has evolved significantly in the last five years, and 2014 will be a crucial year for its recovery. These four trends — financing, costs, green building/LEED certification and public-private partnerships — will continue to shape the commercial construction industry in 2014 and beyond.

Dermot Roe is managing director and national construction lead at Jones Lang LaSalle.