Reis: 1Q Commercial Construction Contracts
Commercial real estate construction contracted slightly during the first quarter compared to the previous three quarters but remains healthy, reported Reis, New York.
Reis Senior Economist and Director of Research Ryan Severino noted that first quarter construction often slows noticeably because cold winter months often inhibit construction. He said construction by property type varied as apartment continued to surge while office and retail construction lagged behind.
“Nonetheless, the general trend in construction from the last few years remains intact,” Severino said. “Construction across all major property types continues to increase, fueled by the ongoing recovery in the economy and property fundamentals.”
More than 42,000 apartments units delivered in early 2016, the highest first quarter figure since Reis began tracking the market on a quarterly basis in 1999. “This total portends that 2016 is likely to be the high-water mark for construction during this cycle,” Severino said.
With the year off to a strong start, Reis predicted that 260,000 new apartment units will deliver this year. “On a metro basis, markets across the south continue to lead the way, especially the big three Texas markets [Houston, Dallas-Fort Worth and San Antonio], which all rank in the top five markets for number of new units completed,” Severino said.
Office completions declined to 6.06 million square feet during the first quarter. “This clearly represents a pullback relative to recent construction activity,” Severino noted. “However, this figure is in line with what has occurred in the market during first quarters in the last few years so it is not outside the realm of what should be expected.”
But Severino said he expects 42 million square feet of office space to come online this year, the highest annual total since 2009, when construction begun before the recession delivered.
Reis reported that retail sector construction fell to 1.56 million square feet, the lowest quarterly construction figure since first quarter 2014.
“Although the economy has been growing for nearly seven years, there remains little appetite to develop new retail centers,” Severino said. He listed several reasons. First, excess inventory remains across many retail subtypes in some markets due to the last decade’s construction boom. “Second, demand remains relatively weak for many centers due to the relative weakness in the economic recovery and its modest impact on demand for retail space overall,” he said. “Third, the increased competition from ecommerce, while not the death knell for brick-and-mortar retail, certainly dissuades many from building.”
Despite the slow first quarter, construction activity remains on a “very slow, gradual upswing” along with the overall economic environment, Severino said, noting that new retail construction could total 9.8 million square feet this year. “Although this is incredibly low by historical standards, it would nonetheless be the highest calendar-year total since 2009,” he said. “While more robust construction figures are anticipated over the next few years with the economy posed for further growth, the market is not yet ready to push construction totals because of the aforementioned headwinds the sector faces.”
