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U.S. construction trends and outlook (Q1 2016)

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U.S. construction trends and outlook (Q1 2016)

  1. 1. Global economic shifts are causing decision makers to think more strategically about development United States Construction Perspective Q1 2016
  2. 2. Economic struggles from far away affect our own built environments more as the world becomes more interconnected. Although the United States had success in recovering after the financial crisis, several economic headwinds are dampening the global recovery. These issues include: • A reduction in investment, driven in part by low interest rates and the threat of deflation • Political and economic uncertainty and unrest in various regions, including the refugee crisis and political change • Stagnant productivity and employment growth • Low commodity prices, especially in powerhouses like China and in oil producing countries In a global import and export economy, those issues listed above will affect business demand, and in turn construction demand, in the United States. Many large multinational corporations are having to consider future income streams when deciding where to invest in capital expenditures. Consumers are dialing back spending, forcing retailers to come up with new and exciting ways to attract and retain loyal customers. The upcoming presidential election has businesses wary, as they weigh the pros and cons of each candidate. Despite these concerns, the United States construction industry saw a strong first quarter, with projections of steady, albeit lower level, growth in Q2. Even though developers and occupiers are proceeding with caution, they continue to build. And as we keep monitoring the global economy, it is important to remember the construction industry lags the broader economy one to two years, giving vigilant experts ample opportunity to asses portfolio strategy in advance of any economic stagnation.
  3. 3. Global economics: Growth is plateauing
  4. 4. Global interest rates in key economies remain low, as countries are not bullish on future growth -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Reserve Bank of Australia Federal Reserve Swiss National Bank European Central Bank Bank of Japan Reserve Bank of New Zealand Bank of Canada Bank of England Interest rates: Major central banks Rate cuts stimulate a struggling economy, while high interest rates show that a government is confident about future growth, or that inflation is growing. Average: 0.6 percent Source: JLL Research, OECD
  5. 5. GDP growth is projected to grow slightly through 2017, though key regions will have steep declines 5 GDP,PPPexchangerate,basispoints Source: JLL Research, OECD Most recent available data at time of publication -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 2015 2016 2017 GDP declines are partially due to the steep drop in oil prices, the steel glut, and global debt.
  6. 6. China’s deceleration has some of the biggest ripples worldwide 6 The manufacturing behemoth's rapid GDP decline will affect demand for global construction commodities 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2010 2011 2012 2013 2014 2015 GDP,PPPexchangerate,basispoints
  7. 7. Global employment declined 77.2 percent since the crisis 7 An employment slump sends ripples through the broader economy, as demand for import goods and ability to manufacture export goods decline 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Q42015unemploymentrates,OECDcountries Source: JLL Research, OECD Most recent available data at time of publication
  8. 8. Domestic economics: Still growing, though cautiously
  9. 9. Domestic GDP grew more slowly QoQ in Q4, due in part to downturns in nonresidential investment and a decrease in imports 9 -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ContributionstopercentchangeinrealGDP(SAAR) GDP growth declined YoY in Q4 2015, from growth of 2.0 percent to 1.4 percent growth. Though the rate is continuing to slow, the U.S. has seen the strongest recovery worldwide since the recession. Source: JLL Research, Bureau of Economic Analysis Most recent available data at time of publication
  10. 10. GDP per capita continues to grow at a steady rate domestically, despite global concerns 10 Source: JLL Research, World Bank Most recent available data at time of publication $42,000 $44,000 $46,000 $48,000 $50,000 $52,000 $54,000 $56,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 GDPpercapita
  11. 11. 11 Constructionemployment(numberofemployees,inthousands) Overallemployment(numberofemployees,inthousands) Domestic construction employment grew 4.7 percent YoY, despite a slump in early 2016 Source: JLL Research, Bureau of Labor Statistics Most recent available data at time of publication 120,000 125,000 130,000 135,000 140,000 145,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2010 2011 2012 2013 2014 2015 2016 Construction Overall Employment
  12. 12. Productivity is increasing since 2009 lows, as laborers put in increasingly more hours 12 Source: JLL Research, Bureau of Labor Statistics Most recent available data at time of publication Construction workers are working more hours, with higher wages, driving up overall construction costs. Percentchangeinhoursworked:Nonresidentialconstruction -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
  13. 13. Q4 Construction Backlog Indicator (CBI) declined in the West and Northeast, while the South’s CBI grew 8.7 percent MoM 13 Infrastructure CBI grew 23.2 percent MoM, as big projects ramp up countrywide 7.1 months 11.2 months 8.4 months6.5 months National average construction backlog 8.4monthsThe CBI indicates the number of work that will be performed by commercial/industrial contractors in the next few months, based on projects in the pipeline currently. Source: JLL Research, Associated Builders and Contractors Most recent available data at time of publication
  14. 14. Cost trends: Building costs growing at a faster rate
  15. 15. Building costs grew 3.5 percent between 2014 and 2015 - and they continue to grow 0 1000 2000 3000 4000 5000 6000 7000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Building cost index BCI:20-citylaborandmaterialscostaverageindex Overall costs are conservatively projected to grow at an average of 1.5 percent annually through 2020. Source: JLL Research, ENR
  16. 16. MaterialsIndex:weightedpricemovementofstructuralsteel,portlandcement and2X4lumber 16 Commonlaborindex:Unionwageplusfringebenefits Materials prices are projected to grow slightly and flatten through 2020, and labor costs will continue to grow Source: JLL Research, ENR 0 500 1000 1500 2000 2500 3000 3500 4000 0 5000 10000 15000 20000 25000 30000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Common Labor Index Materials Index Global trade flows of commodities are declining as well; total volumes of imports and exports projected to grow by only 2.6 percent in 2015.
  17. 17. 17 Wages continue to grow, though the rate of growth dropped at the end of 2015 Source: JLL Research, Bureau of Labor Statistics $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Privateindustrywagesandsalariesforconstructionindustries
  18. 18. 18 Nonresidentialputinplace($M) Nonresidential put-in-place value is up 10.1 percent YoY, though it saw a decline of 1.4 percent MoM in February Source: JLL Research, U.S. Census Most recent available data at time of publication $580.0 $600.0 $620.0 $640.0 $660.0 $680.0 $700.0 $720.0 Feb. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016
  19. 19. Coastal cities remain the most expensive to build, in part due to high demand and dwindling available space 19 0 20 40 60 80 100 120 140 2016RSMeansnationalcostindex Source: JLL Research, RS Means
  20. 20. $0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 20 Three of the five most expensive markets are in the Bay Area, as San Francisco rents come close to eclipsing New York Source: JLL Research Directaverageaskingrent($p.s.f.) Some of the highest cost construction markets, including Chicago and Philadelphia, do not have the highest rents. It is cheaper for these markets to renovate existing space than to try and attract occupiers from high cost markets.
  21. 21. 0 5000 10000 15000 20000 25000 New York Boston San Francisco Chicago Washington, DC Los Angeles Seattle Portland Denver Phoenix Q2 2015 Q4 2015 21 Cost of construction in major markets (Q4 2015) RLB Comparative Cost Index tracks the bid cost of construction, including labor, materials, contractor and overhead costs. RLBcomparativecostindex High cost construction markets all saw approximately 1.0 percent growth between Q2 and Q4 2015 Source: JLL Research, RLB Most recent available data at time of publication
  22. 22. 22 Construction put in place sector Feb. 2015 Feb. 2016 Highway and Street $80.3M $99.9M Educational $79.2M $85.9M Manufacturing $77.3M $77.9M Commercial $64.1M $71.1M Office $49.8M $62.4M Healthcare $38.9M $40.2M Infrastructure projects demand the majority of nonresidential construction spend, with an increase of 24.4 percent YoY Source: JLL Research, U.S. Census Most recent available data at time of publication
  23. 23. Construction put-in-place: Activity is starting to flatten
  24. 24. The impacts of global uncertainty include lowering capital expenditures Companies are focusing on lean budgeting in the face of low economic confidence 24 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 2010 2011 2012 2013 2014 2015 2016 Future capital expenditures NYCdiffusionindex Source: JLL Research, FRED
  25. 25. 25 22.5 m.s.f. 20.3 m.s.f. 13.6 m.s.f. Q1 2013 12.5 m.s.f. Q1 2014 Q1 2015 Q1 2016 Office starts declined 33.0 percent YoY in Q1 2016, as activity begins to flatten Source: JLL Research, Costar Group
  26. 26. 26 Industrial construction Retail construction 157.7 m.s.f. under construction Q1 2016 Q1 2015 Q1 2016 178.0 m.s.f. under construction 57.2 m.s.f. under construction 70.2 m.s.f. under construction Q1 2015 Q1 2016 Office construction Q1 2015 96.8 m.s.f under construction 80.5 m.s.f under construction Retail construction grew 24.4 percent YoY due to an increase in retail renovation used to attract new consumers Source: JLL Research, CoStar Group Most recent available data at time of publication
  27. 27. 27 Office completions remained at the same level as Q1 2015, after Q4 2015 reached a five-year high Source: JLL Research 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 50,000,000 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 YTDcompletions(s.f.)
  28. 28. 28 8.3 m.s.f. Dallas 3.4 m.s.f. Seattle 4.7 m.s.f. San Francisco 3.3 m.s.f. Silicon Valley 5.7 m.s.f. Houston 4.3 m.s.f. Chicago 3.2 m.s.f. Nashville 14.3 m.s.f. New York City 6.4 m.s.f. Washington DC 3.6 m.s.f. Philadelphia Q1 2016 under construction Nashville became one of the top ten most active office construction markets, while Houston slipped from the most active in 2015 to fourth Source: JLL Research
  29. 29. Nashville, Salt Lake and San Francisco have the lowest vacancy rates nationwide, making them ripe for new construction. 29 The highest vacancy rates were in the Northeast, in New Jersey, Fairfield County and Westchester County. Source: JLL Research 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Nashville Salt Lake City San Francisco Portland Seattle-Bellevue New York Oakland-East Bay Austin Charlotte Orange County Totalvacancy(%)
  30. 30. 30 Industrial deliveries grew YoY in 2016, reflecting overall growth in the domestic industrial sector Source: JLL Research 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 YTDcompletions(s.f.)
  31. 31. 16.0 m.s.f. Inland Empire 7.7 m.s.f. Reno 31 24.4 m.s.f. Dallas 4.2 m.s.f. Tampa Bay 4.3 m.s.f. Oakland 10.2 m.s.f. Houston 16.9 m.s.f. Chicago 5.1 m.s.f. Kansas City 15.3 m.s.f. Atlanta 13.3 m.s.f. Philadelp hia Tampa Bay saw a spike in activity in Q1, eclipsing Los Angeles in the top 10 industrial construction markets Source: JLL Research Q1 2016 under construction
  32. 32. 32 Retail deliveries are down 16.8 percent YoY, though current activity saw a spike Source: JLL Research, CoStar Retailcompletions(s.f.) 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016
  33. 33. 33 3.8 m.s.f. Houston 1.9 m.s.f. Los Angeles 4.0 m.s.f. Dallas 2.6 m.s.f. Chicago 2.3 m.s.f. Washing ton, DC 3.1 m.s.f. Northern NJ 2.4 m.s.f. Long Island 2.6 m.s.f. New York City 2.1 m.s.f. Boston 2.3 m.s.f. Miami Dallas had the most retail activity in Q1, up 73.9 percent QoQ; activity on the coasts remained flat Source: JLL Research Q1 2016 under construction
  34. 34. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012 2013 Q1 2014 Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015 Q3 2015Q4 2015 Q1 2016 34 Percentvacant -0.1 percent QoQ Retail vacancies continued to decline, though at a slower rate Source: JLL Research, CoStar
  35. 35. What’s next for U.S. construction?
  36. 36. Key construction markets 36 Source: JLL Research Nashville has seen rapid construction growth, as employers take advantage of its low-cost, well- educated workforce. This follows the broader trend in the Southeast, as office, industrial and retail have all seen an uptick in activity in the last year. San Francisco is catching up to New York in terms of cost to build, driven by demand and high labor costs. It is possible San Francisco could become the most expensive market in 2016, though all major coastal cities will continue to see cost growth. The decline in energy prices has begun to hit Houston, which saw a decline of 120.1 percent in office construction activity YoY. The market has seen a growth in subletting opportunities and has low-cost labor, which could be attractive to occupiers wanting to avoid high-cost markets. Dallas saw a hike in retail construction, as retailers followed population flows to Texas. It was one of the lone markets that experienced retail development growth.
  37. 37. What’s next for construction? Uncertainty will breed more caution: The 2016 election is ramping up and will affect consumer behavior as domestic residents weigh who they think will become the next leader. Businesses are likely to proceed with caution when it comes to construction investment as they prepare for future regulations or economic shifts coming from the new president. The Fed increased interest rates, indicating faith in the domestic economy; however, the global economy has slowed, and contractors are uncertain how this may affect the markets. Most noticeably, many inputs, such as low-cost steel, are manufactured in bulk in China. As its manufacturing sector continues to decline, materials prices will continue to drop into 2016. Wages will remain the key cost driver for construction, as materials prices remain relatively low in the short term. There remains a dearth of trained construction employees, especially in trade positions, and wages are rising as a result. Construction follows the global economy but lags it by 1-2 years. General economic growth nationwide has slowed, and the construction industry will be no different. However, demand from downstream markets will stay strong and construction profit margins will continue to grow, keeping construction growing at a faster rate than the overall economy. The effects of the global plateau won’t fully affect the construction industry until at least 2017.
  38. 38. © 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Thank you Dana Westgren Research Analyst Project and Development Services +1 (202) 719 5003 Dana.Westgren@am.jll.com

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