Commercial Construction Industry Outlook and Trends

11/18/2013 |

The commercial construction sector is improving.

The outlook for the U.S. commercial construction industry is positive, according to a new report from Jones Lang LaSalle (JLL).

After a rough recession that brought the sector to a standstill in 2009, JLL identified four trends shaping the industry and is calling the comeback an “Extreme Makeover,” which the organization has detailed below.

Financing is Back

Then: A frenzy of overheated lending precipitated the real estate market and drove record construction starts, even as the global financial crisis emerged in 2008. By 2009, construction lending froze, as banks scrambled to reduce risks.

Now: Echoing the healthy activity in construction spending, commercial lending conditions are improving, even while lending standards have remained stagnant. The low cost of capital and re-emergence of the commercial mortgage-backed securities (CMBS) market have both enabled increased liquidity and easier lending. New CMBS issuance totals $50.8 billion so far through the beginning of August 2013, twice the level achieved through the first eight months of 2012. According to the Federal Reserve Board’s Commercial Lending Sentiment survey, 47.8% more respondents reported higher demand for commercial real estate loans in the third quarter of 2013 compared to the second quarter. This dwarfs the 23.4% response seen this time last year, and represents the biggest improvement in demand in more than a decade.

Construction has Become Expensive

Then: Building materials kept construction costs manageable before the crisis. High demand for new construction and free-flowing financing drove bulk purchases at lower prices.

Now: Construction costs are outpacing the recovery in most of the country. The booming single-family home sector has generated rising construction costs for the commercial sector as well, including driving up the cost of labor. According to Rider Levett Bucknall’s Construction Cost Index, which uses construction fees to derive a trend in overall construction costs, the cost of construction increased 3.6% this year. This compares to a 1.5% increase this time last year, and annual growth rates that barely eclipsed two percent in the last two years.

All Buildings are Green Buildings – the Best are Both Green and Smart

Then: Green building features were incorporated upon request, but were generally viewed as expensive and “nice to have” luxuries.

Now: Environmentally-sustainable features are viewed as table stakes by owners and developers, and attention to green building materials is considered a core competency.

LEED v4 formally launched this month and introduced new changes to enhance green building standards. Major new provisions in LEED v4 include expanding property type-specific designations, weighing points more heavily on optimizing energy performance, and a new “cradle to cradle” component. The cradle to cradle provision seeks to ensure that the products and resources used during construction are safe and designed for recycling or composting, and that the manufacturing process for construction materials manages its carbon footprint.

Sandy, Stimulus, and PPPs Shape Revenue

Then: Demand for construction came primarily from private-sector economic expansion.

Now: Much-needed infrastructure updates and rebuilding in the wake of severe storms are driving construction recovery in many geographies. 

While infrastructure is clearly an issue facing the U.S., currently there are little funds available to states for new projects. As a result, public-private partnerships (PPPs) are emerging as a solution when public funding is limited. Natural disaster reconstruction remains “top of mind” for construction executives on the one-year anniversary of Superstorm Sandy, as climate analysts predict more frequent volatile storms in the future.

The 2013 Construction Outlook can be found on JLL’s website.  

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