JLL: National Construction Spending Reached Cyclical High in Q3

Construction spending continues to hit cyclical highs, reaching $317 billion in the third quarter, up one percent year-over-year, reported JLL, Chicago. 

But while this may represent the highest point this cycle, the small increase compared to past third-quarter growth averaging 7-plus percent year-over-year could indicate an impending slowdown, JLL said.

“The construction industry is cyclical and a national slowdown is to be expected,” said JLL President of Project and Development Services Todd Burns. “In 2017, industry players will be closely monitoring real estate decisions, per project staffing and tech and hardware innovations to get the most bang for their buck.”

JLL said a “robust” construction pipeline combined with rising building and materials costs and a shrinking labor pool could explain the lackluster construction-spending growth. Materials costs reached a five-year high 2.2 percent growth rate year-over-year, largely due to strong demand for lumber. “Building costs as a whole have increased in the third quarter,” JLL said, noting a “slow but steady” 2.6 percent growth rate year-over-year.”

Over the course of 2017, U.S. markets can expect softening construction volumes as demand and market saturation begins to level out across property types,” the report said. 

But interest rates do not pose a dramatic threat to construction financing, JLL said, noting a relatively flat–between 20-50 basis points–LIBOR for nearly nine years.

JLL observed several other themes affecting construction:

–Economic uncertainty: Although current U.S. construction volumes remain steady and growing, investors, financiers and contractors alike are beginning to approach decisions with caution, weighing risk and opportunity, JLL said: “Confidence indicators in the construction, development and lending industries are beginning to falter, depicting a changing mindset as tides begin to turn.”

–Labor challenges: Record-breaking commercial construction activity along with a 4.5 percent construction unemployment rate–the lowest in more than 14 years–created a high labor demand-low labor supply scenario. The average hourly wage reached nearly $30 per hour in July as a result–more than 3.5 percent higher than a year ago and far outpacing the 2.4 percent national average annual growth rate. “With high construction volumes across property types and a dwindling labor pool, expect demand to remain elevated for the time being,” JLL said.

–Technology boom: the construction and development industries have made strides by implementing new productivity software and technology products such as drones and virtual-reality devices. “Technology has become a game-changer for project managers and contractors looking to streamline processes and offer an all-in-one solution,” JLL said.