Q1 2015

Construction costs will remain high
despite the decline in oil prices.
United States Construction
Perspective
Q1 2015
In late 2014, oil prices experienced significant
declines due to oversaturated supply and a
slowdown in global demand. Prices have since
stabilized but at depressed levels. Materials
prices were projected to drop in correlation
with oil, but high demand for most major
construction inputs has kept prices up overall.
Low gas prices typically drive an uptick in
demand for retail, e-commerce, and industrial
real estate. However, shipping costs remain
high due to a decline in available labor,
negating much of the oil price savings.
In the office market, the development pipeline
continues to expand alongside rents, which
increased 3.1 percent this quarter. U.S.
markets are set to deliver more than 80 million
square feet currently under development.
Energy-heavy markets such as Houston are
exceptions to this trend, as declining demand
stifles the need for new space.
We expect strong demand for most property
types and costly construction labor will
counter any price relief low oil prices has on
materials for the foreseeable future.
National economic trends
Crude oil is selling for half of its June 2014 value, as an
oversupply of crude hits the market.
($ per
barrel)
Crude Spot Price, Cushing OK
$120
$100
-52.2%
$80
$60
$40
$20
$0
April
March
February
January
December
November
October
September
August
July
Source: JLL Research, U.S. Energy Information Administration
4
GDP growth slowed in 2015, despite positive expectations from
economists.
10.0%
Overall real GDP growth
Construction component growth
0.2%
Overall GDP growth in Q1 2015,
far below expectations.
(Q-o-Q change)
5.0%
0.0%
-5.0%
Construction GDP has
increased more quickly than
overall GDP since 2012.
-10.0%
-15.0%
Source: JLL Research, Bureau of Economic Activity
5
The steady expansion in construction employment since 2012
comes to an end as labor force participation declines.
Construction employment (number of employees)
Construction
Overall Employment
6400
144000
Overall employment (number of employees)
6600
Both construction unemployment and
overall unemployment have seen
approximately 0.0 percent growth in 2015,
as labor participation rates continue to
decline.
142000
140000
6200
138000
6000
136000
5800
134000
5600
132000
130000
5400
128000
5200
126000
5000
124000
4800
122000
2010
2011
2012
2013
2014
2015
Source: JLL Research, Bureau of Labor Statistics
6
Construction unemployment rates rose in early Q1 2015, resting
above Q4 2014 totals.
This could be due to an extreme winter, which caused a break in construction activity
(%)
30.0
5.6%
Construction
Overall
25.0
Overall unemployment rate
March 2015
20.0
9.5%
Construction unemployment rate
March 2015
15.0
10.0
5.0
0.0
2008
2009
2010
2011
2012
2013
2014
2015
Source: JLL Research, Bureau of Labor Statistics
7
The Architecture Billings Index began to grow again in March, as
more projects enter the design phase in spring 2015.
The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 11 months
60
55
50
45
40
35
ABI was 51.7 in
March, as the ABI
rebounds from early
2015 declines.
30
25
20
Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge
8
The Construction Backlog Index dipped slightly in Q4 2014.
CBI
CBI
Despite this decline, CBI rests 4.4 percent higher than Q4 2013, meaning 2015 will be another
strong year for construction starts.
1.3%
0.1%
q-o-q.
q-o-q.
CBI
-21.2%
This decline can be attributed to
issues in West Coast ports, related
economic uncertainty, and a sharp
decline in public construction.
CBI
q-o-q.
3.5%
q-o-q.
8.7
mos
National average
construction backlog
Source: JLL Research, Associated Builders and Contractors
9
Cost trends: Labor and materials
The value of nonresidential construction is rebounding since
2011 lows, as demand for new construction grows.
($M)
Value construction put-in-place February y-o-y
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014r
2015r
Source: JLL Research, U.S. Census
11
Construction spend in most major sectors is increasing, though
healthcare spend continues to decline.
Total spend Q1 2015
Percent change year-over-year
Education
$74.7 billion
4.6 percent
Manufacturing
$60.9 billion
37.9 percent
Commercial
$59.7 billion
13.5 percent
Office
$48.9 billion
13.5 percent
Healthcare
$37.3 billion
- 4.1 percent*
Amusement/Recreation
$18.3 billion
22.5 percent
* Decline due to decrease in public sector spending, increase in hospital consolidations, and more hospital closings
Source: JLL Research, U.S. Census
12
Construction costs are continuing to grow, despite the slowdown in
energy prices.
The continued growth of labor costs in most major markets enhances overall construction cost
30000
Nat'l CCI
Materials Index
Labor Index
10000
25000
8000
20000
6000
15000
4000
10000
2000
5000
0
Common labor index: Union wage plus fringe benefits
CCI: 20-city average of common labor rates plus material inputs
12000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: JLL Research, ENR
13
Costs have increased in all major markets, with the biggest cost
growth in San Francisco: 6.0 percent year-over-year.
RLB Comparative Cost Index
tracks the bid cost of
construction, including: labor,
materials, contractor, and
overhead costs.
Cost of construction in major markets
25000
2014
2015
20000
15000
10000
5000
0
Boston
Chicago
Denver
Los Angeles New York
Phoenix
Portland
San
Francisco
Seattle
Washington,
DC
Source: JLL Research, RLB
14
Want to save money on construction costs? Build in the South.
Cities with more land availability and lower labor costs maintain lower overall prices
40000
ENR labor cost index by city
35000
Common Labor Index
30000
25000
20000
Labor expenditures are driving the growth in
construction costs: Dallas, New Orleans, and
Atlanta have the lowest labor costs, as well
as the lowest cost overall.
15000
10000
5000
0
The Common Labor Index is the labor component of ENR’s Construction Cost Index and tracks the union wage, plus fringe benefits, for laborers.
Source: JLL Research, ENR
15
Material Price Index indicates continued growth in costs…
Materials Index
3500
Weighted price movement of steel, cement, and lumber
3300
3100
2900
2700
Materials costs grew just
1.5% from 2014 and 2015.
2500
2300
2100
1900
1700
1500
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
ENR Materials Price Index tracks weight price movement of structural steel, portland cement, and 2x4 lumber.
Source: JLL Research, ENR
16
… with some notable exceptions, driven by a range of external
factors.
Material
March prices: percent change Y-o-Y
Aluminum Sheet
-1.1%
Asphalt Paving
1.5%
Cement
1.5%
Concrete Block
4.8%
Copper Pipe
-9.9%
Diesel Fuel
-40.7%
Fabricated Steel
1.1%
Gypsum Board
22.6%
Lumber/Softwood
4.0%
Plywood
2.1%
PVC Water Pipe
2.8%
Ready-Mix Concrete
-0.2%
Sheet Metal
2.2%
• Overproduction of copper and steel has created a glut
on the market, with supply outstripping demand,
driving down price growth.
• Cement is posting historically high price increases,
thanks to increasing demand.
• Plywood and gypsum wallboard are also growing, as
demand for these materials grows. This demand
expansion is due to job market growth, consumer
confidence, and an increase in construction projects.
-0.4% price decline in March 2015
Source: JLL Research, ENR
17
Decline in diesel fuel cost will not decrease the overall value of
construction, but some sectors will contract as a result.
Annual percent change in diesel fuel prices:
Monthly 2014-2015
July
August
September
October
November
December
January
February
0.0%
-5.0%
10%
Projected increase of
construction put in place
value, despite downturn
in prices.
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
Energy price declines will
disproportionately affect manufacturing:
the sector may decline 25 percent over
the next year.
-35.0%
-40.0%
-45.0%
Source: JLL Research, ENR
18
Construction starts and put-in- place
Q1 2015 office starts are down from Q1 2014, though still well
above 2012 levels, indicating demand for new stock is still high.
Q1 2012
11.6 m.s.f.
Q1 2013
Q1 2014
Q1 2015
13.4 m.s.f.
22.2 m.s.f.
20.8 m.s.f.
Source: JLL Research, CoStar, McGraw Hill
20
Office vacancy rates held steady in Q1, but will decline in 2015
as corporate expansions absorb space.
Office vacancy rates
17.5%
17.0%
Vacancy in Q1 2015 sat at 15.6
percent, should drop to below 15.0
percent by end of year.
16.5%
16.0%
15.5%
15.0%
14.5%
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Source: JLL Research
21
The dollar value of construction put-in-place has declined in Q1
2015, though it is still substantially higher than pre-recession
lows.
($M)
450,000
Value of construction put-in-place
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
Source: JLL Research, Census Bureau
22
Office and industrial construction continue to rise, despite oil
prices slowing the building surge in Houston.
Office construction
Industrial construction
Q1 2015
Q1 2014
22.2
m.s.f. under
construction
Q1 2014
86.8
Q1 2014
m.s.f. under
construction
122.8
m.s.f. under
construction
Q1 2015
157.7
m.s.f under
construction
Retail construction
Q1 2015
Q1 2014
57.2
m.s.f. under
construction
43.0
m.s.f. under
construction
Source: JLL Research, CoStar Group
23
Office completions in 2015 are twice the amount of Q1 2014, as
2014’s starts are delivered to the market.
140,000,000
Annual completions (s.f.)
120,000,000
100,000,000
80,000,000
Q1 2015 Completion
totals: 8.7 m.s.f.
vs.
60,000,000
Q1 2014: 4.3
m.s.f.
40,000,000
20,000,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 Q12015
Source: JLL Research
24
The amount of vacant sublease space nationally has declined, as
firms begin scooping up empty, prime subleases.
100,000,000
Despite the decline nationally, energy-rich
markets have seen a huge jump in sublease
space available. Houston has seen 3.0 M.S.F.
of new sublease space enter the market since
January 2015.
Sublease space (s.f.)
90,000,000
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
2009
2010
2011
2012
2013
2014
2015
Source: JLL Research
25
Houston’s office rents dipped slightly as crude oil prices tanked,
though still rest above 2013 rates.
Houston Class A Office Rent vs. WTI spot price by Quarter
WTI Spot Market Crude Oil Price ($/bbl)
$140.00
Houston Office Market Avg. Rental Rates
($/SF/YR Class A)
$40.00
WTI Spot Price
$35.00
$100.00
$80.00
$30.00
$60.00
$40.00
Houston average $/s.f. rent
$120.00
$25.00
$20.00
$0.00
$20.00
YE 2015
YTD 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
Q1 2012
Q4 2011
Q3 2011
Q2 2011
Q1 2011
Q4 2010
Q3 2010
Q2 2010
Q1 2010
Q4 2009
Q3 2009
Q2 2009
Q1 2009
Q4 2008
Q3 2008
Q2 2008
Q1 2008
Source: JLL Research
26
Portland, Seattle, and Washington DC have the most uniform and
lowest office construction costs of all markets.
Range of office construction costs in major markets
($ p.s.f.)
$400
$350
$300
$250
$200
$150
$100
Phoenix has the lowest
construction cost thanks to
available land and low-cost
labor.
$50
$0
Boston
Chicago
Denver
Los
Angeles
New York
Phoenix
Portland
San
Francisco
Seattle Washington
DC
Source: JLL Research, Rider Levett Bucknell
27
Office construction is seeing rapid growth nationally, particularly in
the Southeast and Northwest, while it has slowed in Houston and the
Northeast.
6.91
M.S.F.
Seattle
5.08
M.S.F
Boston
2.07
M.S.F.
Portland
7.2
M.S.F
New York
Philadelphi
City
3.84
M.S.F.
3.13
M.S.F.
Chicago
3.13
M.S.F
San
Francisco
a
2.13
M.S.F.
DC
2.34
M.S.F.
Denver
1.62
M.S.F.
San
Diego
3.66
M.S.F.
Phoenix
1.62
M.S.F.
Atlanta
7.14
M.S.F.
Dallas
1.57
M.S.F.
Charlotte
The dollar value for
construction starts in
Georgia is up 13 percent.
12.59
M.S.F.
Houston
Q1 2015 under construction
Source: JLL Research
28
Industrial completions in Q1 2015 grew 27 percent from Q4
2014.
(s.f)
450,000,000
400,000,000
Annual completions
350,000,000
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Q1
2015
Source: JLL Research, CoStar
29
Consumer confidence is increasing as oil prices decline, spurring
firms to invest in growing warehouse and e-commerce space..
($B)
U.S. total warehouse construction put-in-place
$20
$18
$16
$14
2.5
points
Consumer
Confidence Index
$12
$10
$8
$6
$4
$2
$0
Source: JLL Research, US Census
30
Industrial construction costs remain lower than office.
Highest cost stock is in Los Angeles and San Francisco, mainly due to land and labor costs
($ p.s.f.)
Range of warehouse construction costs in major markets
$180.0
$160.0
$140.0
$120.0
$100.0
$80.0
$60.0
$40.0
$20.0
$0.0
Boston
Chicago
Denver
Los
Angeles
New York
Phoenix
Portland
San
Francisco
Seattle Washington
DC
Source: JLL Research, Rider Levett Bucknell
31
Industrial square footage under construction is growing in the South,
Northeast, and West, and slowing in the Midwest.
3.8
M.S.F.
Seattle
13.3
3.3
M.S.F.
East Bay
M.S.F.
Philadelphia
8.7
M.S.F.
Chicago
3.8
M.S.F.
Indianapolis
3.6
M.S.F.
Los
Angeles
20.1
M.S.F.
Inland
Empire
2.6
M.S.F.
Phoenix
Inland Empire under
construction increased 50%
since Q4 2014.
3.2
M.SF.
Central
NJ
1.8
M.S.F.
Baltimore
3.1
M.S.F.
Charlotte
13.9
M.S.F.
Dallas
18.9
M.S.F.
Atlanta
6.3
M.S.F.
Houston
Q1 2015 under construction
Source: JLL Research
32
Retail deliveries are down, as consumer activity floundered in the
colder months; increased consumer confidence in the spring will
spur development.
Historical Retail Deliveries
Annual completions (s.f.)
300,000,000
250,000,000
200,000,000
150,000,000
Starts are down, from 12.5
MSF delivered in Q1 2014 to
9.5 MSF in Q1 2015.
100,000,000
50,000,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 Q1 2015
Source: JLL Research, CoStar
33
Despite lower oil prices a shortage in trucker employment keeps
delivery costs high.
Wages and employment in trucking industry
$23
1,500
Wages
$23
Employment
Average hourly wage
$22
1,400
$22
$21
1,350
$21
Thousands of Employees
1,450
1,300
$20
$20
1,250
$19
1,200
$19
$18
1,150
2007
2008
2009
2010
2011
2012
2013
2014
Source: JLL Research
34
San Francisco and Los Angeles have the highest-price prime
retail construction cost; Denver remains the lowest cost.
Range of retail construction costs in major markets
($ p.s.f.)
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
Boston
Chicago
Denver
Los
Angeles
New York
Phoenix
Portland
San
Francisco
Seattle Washington
DC
Source: JLL Research
35
Significant retail square footage is under construction in the
South, Northeast, and Southern California markets.
0.3
M.S.F.
Seattle
1.6
M.S.F.
Boston
0.3
M.S.F.
San
Francisco
1.6
M.S.F.
Los
Angeles
2.1
M.S.F.
Chicago
0.7
M.S.F.
Denver
1.0
M.S.F.
Orange
County
Retail demand will increase as
consumer confidence grows
across 2015.
0.7
M.S.F.
Philadelphia
1.0
M.S.F.
New York
City
1.2
M.S.F.
DC
0.5
M.S.F.
Atlanta
3.5
M.S.F.
Dallas
1.7
M.S.F.
Houston
0.62
M.S.F.
Tampa
Q1 2015 under construction
Source: JLL Research
36
Overview and outlook
Key construction markets
1.
Houston construction will grind to a halt. Sublease vacancy is high and this is creating opportunities for firms to
move into new, premium space. Construction starts declined in this quarter.
2.
San Francisco’s office market is growing and expensive. Vacancy rates have declined almost 1.0 percent since
Q4 2014 as demand for trophy space skyrockets. At the same time, San Francisco has seen the largest growth in
construction costs across Q1.
3.
The Southeast remains a strong market for construction. Markets boast a large amount of available land, along
with relatively cheap labor costs in most states. Charlotte office starts were up from 379,587 square feet in 2014 to
1.6 million square feet in Q1 2015 as companies cash in on the region’s growth.
4.
New York City remains the most expensive market, driven by high labor costs and demand.
5.
Retail starts are up in Seattle, as they remain stagnant across the rest of the country. Retail companies are
optimistic that 2015 will see more growth, thanks to increased consumer confidence.
Source: JLL Research
38
What’s next for construction?
1.
Construction costs continue to grow, even as starts begin to slow across most major markets.
2.
Though materials costs are rising overall, supply gluts will drive down prices of major commodities,
including copper and steel. The high cost of concrete will continue to balance out this decline.
3.
Demand from downstream markets will remain strong, despite the dropping oil prices. Corporate profits are
projected to increase 2.6 percent annually to 2020, bolstering demand for new construction.
4.
In some markets, replacement costs are lower than purchase prices, meaning constructing new space is
more cost-effective than renting existing space.
5.
Higher consumer spending, as a result of declining oil prices, increasing employment, and growing consumer
confidence, will bolster retail and e-commerce demand, which will lead to increased construction demand in
these sectors.
The construction industry usually lags overall economic recovery by one to two years; the industry is
still in the early stages of its recovery and will continue to grow in response to overall economic growth.
Source: JLL Research, IBISWorld
39
Dana Westgren
Research Analyst- Industry, Project and Development Services
tel +1 312-228-2867
[email protected]
Thank you
© Copyright 2015 Jones Lang LaSalle