JLL: Construction Moving ‘Steadily Forward’

Commercial real estate construction continues to move steadily forward despite growing uncertainty and seasonal swings, reported JLL, Chicago.

Full-year construction spending across sectors grew by 3.7 percent year-over-year, JLL said. The office and hotels sectors showed the greatest growth.

“Modest but steady growth was seen across all indicators and sectors [in the fourth quarter], capping off a record-setting 2016 for the construction industry,” said JLL Senior Research Analyst Mason Mularoni. He noted that full-year construction spending totaled nearly $1.2 trillion, 4.5 percent more than the year before and nearly triple the overall economy’s inflation rate.

Development displayed “resilience” by beating out seasonal swings in the fourth quarter, Mularoni said. “While moderate slowdowns in the west and northeast regions have taken hold, the United States as a whole posted positive growth, due in large part to steady work in the southern states as well as robust growth in the Midwest–signifying that there’s no national slowdown yet,” he said.

New York City and San Francisco remain the most expensive cities for construction in the United States , JLL reported. Oakland, Calif., moved up to the third slot while San Jose, Calif. fell to fourth place.

“Oakland and San Francisco demonstrated the largest cost growth compared to the third quarter, due in large part to the continued lack of labor and strong demand in the California markets,” Mularoni said. He noted that Philadelphia and Washington, D.C. saw the smallest quarterly cost increase, which indicates slowing construction in those markets.

Building costs remained in check throughout the quarter, increasing only 0.6 percent despite widespread skilled labor shortages while unemployment and wage growth demonstrated similarly modest increases, Mularoni said in the JLL Construction Outlook report. “Contractor workload and architecture billings also remained resilient through December, a traditionally slow time for the industry.”

But labor will likely remain a pain point for the construction industry, Mularoni said: “With skilled labor shortages remaining widespread, wages will rise consequently–expect these to affect project timelines and budgets.”

Mularoni noted that by mid-year, large lenders are likely to weigh risk carefully amid lagging demand for new construction loans. “Lenders will adjust loan standards accordingly to encourage increased borrowing while still mitigating risk,” he said.

By the end of 2017, construction industry business dynamics will likely “transform” as labor and materials costs continue to rise and firms struggle to maintain profit margins, Mularoni noted. “Relationships and pricing structures between owners, developers and builders will be forced to adapt accordingly,” he said.