Construction Growth Slowing, Not Stopping in 2016

CHICAGO, Ill. – The copious growth of the construction industry in 2015 is fueling continued strong activity in 2016. According to JLL’s latest report on nonresidential construction activity, the rate of growth in construction is slowing—yet, starts continue at a strong pace.

The catch: growth is expensive. While a welcome decline in prices for steel and some other materials is underway, high labor costs, glass prices and steep competition throughout the industry continue to prove challenging.

“For financial viability, project sponsors will need to strike a balance between the lower costs for some materials, like steel, and the ever-increasing cost of glass and labor,” explains Todd Burns, president, project and development services, JLL Americas. “Location continues to be a key driver in finding success throughout various industry sectors. With a slowed growth in construction, executives need to think strategically in terms of where they will invest.”

Key markets to watch:

• San Francisco, California/Silicon Valley: The cradle of the U.S. high-tech industry continues to be among the most costly markets for construction, motivating some technology companies to look to other tech-engaged cities—such as Chicago, Illinois and Austin, Texas —for new development.
• Southeast: With low labor and land costs, cities like Charleston, West Virginia; Atlanta, Georgia and Charlotte, North Carolina are seeing an influx in population as companies develop new manufacturing and office facilities. In fourth quarter 2015, Atlanta led U.S. industrial construction with 19.6 million square feet under development.
• Houston: Office construction dropped by 41.7 percent in fourth quarter 2015 as oil prices dropped and sublease availability skyrocketed. Enterprising companies will pursue opportunities to relocate to newly affordable office spaces with significant amenities, using the capital saved to invest in modern workplace designs and customized space.

Key sectors to watch:

• Education: In 2015, education sector construction activity grew by more than 12 percent year over year, in terms of project value. In 2016, schools and universities are expected to continue investment in new facilities to capture student spending on campus, developing multi-function laboratories, expanded mixed-use areas and more collaborative spaces on campus.
• Industrial: Industrial construction grew by more than 22 percent year over year, in terms of value, to reach $84.1 million. Project deliveries in this sector also grew year over year, with 178.4 million square feet delivered in 2015. Industrial project starts will likely increase in 2016, given high demand and a lack of available space.
• Commercial: Renovation will continue apace not just in office buildings, but also in retail and industrial facilities as companies re-envision their stores and distribution centers to accommodate new technologies and the omni-channel shopping experience.

A push for new build-outs in the retail sector is expected to continue throughout 2016, as developers reinvent existing space to engage consumers in unique ways and combine brick-and-mortar locations with online stores.