Construction activity grows, and tenant improvement allowances follow suit

Transcription

1 Construction activity grows, and tenant improvement allowances follow suit United States Construction Perspective Q2 2015

2 As construction costs continue to grow nationwide, many landlords are looking to redevelop existing stock in major markets. The focus on tenant improvements (TIs) is also gaining momentum due to the urban renewal trend, which is driven by millennial demand for city center, unique and open spaces. As a large pipeline of new construction is delivered, office landlords will compete for tenants by offering more attractive TI packages. These offerings allow tenants to customize interiors without paying for a full redesign out of pocket and are a key piece of lease negotiations. The average TI allowance nationwide is $30.00 per square foot, and the average is up to just over $50.00 per square foot in central business districts (CBD). This trend extends beyond the office market. Industrial occupiers need more custom e-commerce space, with higher shelving, specialized lighting, new technology and office space. Retailers, who often self fund TI projects, are using brick and mortar stores as an extension of their online presence. They are incorporating more technology into their stores to support an omni-channel sales strategy. Restaurant chains are doing similar work, as quick service restaurants redesign their interiors to better compete with fast casual concepts.

3 National economic trends

4 Contributions to percent change in real GDP (SAAR) GDP growth slowed in 2015, mirroring similar Q1 declines since recovery began in % 8.0% 6.0% Decline in real GDP reflected negative contributions from exports, nonresidential fixed investment and drops in government spending. 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: JLL Research, Bureau of Economic Analysis 4

5 Construction employment (number of employees) After a drop in the winter, construction employment is increasing as starts rebound for the spring. 144, , , , , , , , ,000 Construction Overall Overall employment (number of employees) 126, , , Source: JLL Research, Bureau of Labor Statistics 5

6 Unemployment rate (%) Construction unemployment has declined 20 percent year-overyear since June 2014, as construction demand grows Overall Construction 5.5% Overall unemployment rate June % Construction unemployment rate June Source: JLL Research, Bureau of Labor Statistics 6

7 The Architecture Billings Index slipped in Q2, continuing the cyclical trend since the recovery. The ABI reflects the time between architecture billings and construction spending, and is a 9-12-month leading indicator These fluctuations occur due to regional differences in recovery some markets are seeing consistent construction growth, while others see the occasional dip in activity Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge 7

8 CBI Driven by weather in the Northeast and the West Coast port slowdown, the Construction Backlog Indicator declined sharply This index still rests 4.4 percent higher than Q CBI CBI -0.7% q-o-q -10.2% q-o-q CBI -25.3% q-o-q 5.9% q-o-q 8.4mos National average construction backlog Source: JLL Research, Associated Builders and Contractors 8

9 Cost trends: Labor and materials

10 Nationwide, TI packages are growing as landlords compete to attract clients and more stock comes to the market. Q average TI allowance has eclipsed 2010 highs. $35.00 Average TI package (per square foot) 14.2 percent Growth in TI Allowance form Q lows $30.00 $25.00 $20.00 $15.00 $10.00 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: JLL Research 10

11 The markets with the highest average TI package also have high levels of construction activity. Landlords offer higher dollar-value packages in active markets in order to stay competitive. $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 D.C. also saw the most construction starts in Q2 three starts at 439,394 square feet Average TI package CBD (per square foot) CBD Average: $50.69 $0.00 Washington, DC Atlanta New York - Midtown New York - Downtown Seattle Chicago Boston Denver Fairfield County - Greenwich Minneapolis 11

12 RS Means Cost Index Many of the most expensive markets for office construction also lead the pack for tenant improvement cost Buildout costs per market RS Means Cost Index based on weighted average of 30 key markets. The index average is 100; Greater than 100 indicates higher than average costs. This is based on materials and installation costs needed to build out an office space Source: JLL Research, RS Means 12

13 The increase in TI packages gives occupiers the opportunity for more customized buildouts, despite high costs. Electrical HVAC Drywall 2% 2% 1% Percentage of total materials cost 8% $19.46 Electrical cost per square foot Ceilings Flooring Millwork Demolition Fire Protection 3% 3% 3% 3% 28% Voice Data Glass & Glazing 4% General Conditions Paints & Coatings Audio-Visual General Clean Up Other 6% 6% 7% 9% 15% Source: JLL Research, RS Means 13

14 BCI: 20-city labor and materials cost average index Construction costs continue to increase, despite slight dip in materials cost year-over-year. Labor cost grew 1.4 percent since December National Building Construction Index Materials Index Labor Index Common labor index: Union wage plus fringe benefits Source: JLL Research, ENR 14

15 Nonresidential put in place ($M) The value of nonresidential construction put in place is over $40,000 more than in May $450,000 $400,000 Value construction put in place $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ r 2015r Source: JLL Research, U.S. Census 15

16 The value of construction put in place continues to grow across all major sectors, as project spend increases. Total 2014 Total YTD 2015 Manufacturing $57.8 billion $90.3 billion Education $79.7 billion $81.5 billion Commercial $62.7 billion $66.5 billion Manufacturing spend eclipsed education to take the top spot nationwide. Office $46.1 billion $55.4 billion Healthcare $38.4 billion $39.1 billion Amusement/Recreation $16.6 billion $21.4 billion Source: JLL Research, U.S. Census 16

17 RLB Comparative Cost index Costs have increased in all major markets, with the biggest cost growth in San Francisco: 6 percent year-over-year Apr-14 Apr-15 Cost of construction in major markets RLB Comparative Cost Index tracks the bid cost of construction, including labor, materials, contractor and overhead costs New York Boston San Francisco Chicago Washington, DC Los Angeles Seattle Portland Denver Phoenix Source: JLL Research, RLB 17

18 Rates of growth are increasing in many markets, though Boston, NYC and Portland are seeing rate declines. 1.8% 1.6% Q Q Change in construction cost QOQ 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Boston Chicago Denver Los Angeles New York Phoenix Portland San Francisco Seattle Washington, DC Source: JLL Research, RLB 18

19 Weighted price movement of steel, cement and lumber Materials prices are increasing, though rates of increase are declining Materials Index percent YOY growth in materials cost ENR Materials Price Index tracks weight price movement of structural steel, Portland cement and 2x4 lumber. Source: JLL Research, ENR 19

20 Growth in materials prices is driven by gypsum board and other lumber materials. Material Percent change YOY Aluminum Sheet -0.3% Asphalt Paving 1.2% Cement 0.4% Concrete Block 2.2% Copper Pipe -5.8% Fabricated Steel 1.1% Gypsum Board 25.8% Lumber/Softwood 4.0% Plywood 1.8% PVC Water Pipe 5.2% Ready-Mix Concrete 3.3% Sheet Metal 1.1% Though cement price growth remains low, it still saw an overall boost of 8.4 percent since last year. This supports the overall cost increase in the industry. Copper and aluminum continue to see price declines, and steel has experienced very lowlevel increases as the market struggles with over saturation of supply. Source: JLL Research, ENR 20

21 Common labor index: Union wage plus fringe benefits Labor costs continue growth, though at a lower level than in previous years Labor Index As employment in the construction sector continues to grow, wages should stop rising and stay steady in the future Source: JLL Research, ENR 21

22 Common labor index: Union wage plus fringe benefits Costs remain low in Southern states, while states with a large union presence remain pricier ENR labor cost index by city Source: JLL Research, ENR 22

23 Construction activity

24 Q starts are at the highest point since the downturn, as the economic recovery continues. Q Q Q Q Source: JLL Research, CoStar, McGraw Hill 24

25 Completions (s.f.) Though office construction is rebounding from 2012 lows, activity is still below historical norms. 140,000,000 Historical construction completions 120,000, ,000,000 80,000,000 60,000,000 Average completions ,000,000 20,000, Source: JLL Research 25

26 Despite a slowdown in the winter months, construction in office and industrial is up year-over-year. Office construction Q Q Industrial construction Q Q under construction 86.3 under construction under construction m.s.f under construction Q Retail construction Q Q under construction 45.3 under construction Growth in retail construction of 2 m.s.f since Q Source: JLL Research, CoStar Group 26

27 Vacancy (square feet) Office vacancies are slowly declining, as companies begin to renovate and occupy older stock buildings. 730,000, percent since Q ,000, ,000, ,000, ,000, ,000, ,000,000 30,000,000 Source: JLL Research

28 Weschester County Phoenix Cleveland Cincinnati St. Louis San Antonio Dallas Indianapolis Atlanta Los Angeles West Palm Beach Kansas City Jacksonville Silicon Valley Milwaukee Miami Minneapolis Sacramento Detroit San Diego Richmond Houston Columbus Orlando Baltimore Fort Lauderdale Chicago Tampa Denver Raleigh/Durham Pittsburgh Washington DC Boston Philadelphia Austin Salt Lake City San Francisco New York City East Bay/Oakland Seattle Charlotte Portland The most available office space is in the Midwest and South, as vacancy tightens nationwide. 30.0% Vacancy rates by CBD 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: JLL Research 28

29 Annual completions (square feet) Q completions are up 60 percent from Q2 2014, despite the winter building decline. 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: JLL Research 29

30 New York, San Francisco, and Chicago have a wide cost variance in their submarkets, giving them wider cost ranges overall. ($ p.s.f.) $400 Range of office construction costs in major markets $350 $300 $250 $200 $150 $100 $50 $0 Boston Chicago Denver Los Angeles New York Phoenix Portland San Francisco Seattle Washington DC Source: JLL Research, Rider Levett Bucknell 30

31 The square footage of office space under construction declined country-wide in Q2, due in part to severe springtime weather. 7.0 Seattle 3.1 San Francisco 1.4 Portland 3.1 Denver 2.3 Chicago 2.0 Cincinnati 3.8 Philadelphia 9.5 New York City 2.13 Washington, DC 4.5 Boston 3.66 Phoenix 8.5 Dallas 2.9 Austin 11.1 Houston 0.5 Atlanta Despite the general decline in square footage under construction, New York saw construction activity increase by nearly 2 million square feet. Q under construction Source: JLL Research 31

32 Tenant improvements become more vital as occupiers customize newly acquired space and attract millennial workers percent percent The percentage of millennials in the workforce will increase by almost 20 percent; Between 2014 and 2020 and companies must work harder to attract and retain top talent. Millennials seek unique office space design, supporting collaborative work that supports creative thinking. According to a Deloitte survey, 78 percent of millennials are strongly influenced by how innovative a company is when making a career decision. Tenant improvements can support this innovation in the office market, as companies fill vacant space. This customization includes new public areas, more access to technology in meeting and collaboration rooms, and open, mobile workspaces. Firms without these new finishes may find it more difficult to attract and retain younger talent. Companies spend millions on these renovations this is especially true for high-technology firms. The highest-cost buildout for San Francisco-based technology firms in 2014 was $12 million. Source: JLL Research 32

33 Industrial Completions (square feet) Industrial completions in Q are up 13.9 percent year-overyear, as many of the 2014 starts come onto the market. 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000, Q Q Q Q Q Q Source: JLL Research, CoStar 33

34 Industrial construction cost ranges are the largest in California, with very little cost differential in the East Coast. ($ 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 34

35 Industrial square feet under construction is growing, especially in the South and West. 3.1 Seattle 3.0 East Bay 3.8 Los Angeles 4.5 Central valley 6.7 Reno 24.4 Inland Empire 13.0 Dallas 4.2 Kansas City 8.9 Chicago 3.3 Indianapolis 3.0 Cincinnati 17.3 Atlanta 2.9 Charlotte 14.6 Philadelphia Inland Empire under construction increased 50 percent since Q Houston Q under construction Source: JLL Research 35

36 Annual completions (square feet) Retail deliveries in 2015 are below 2014 totals, as smaller squarefootage stores increase in popularity. 20,000,000 Retail deliveries Smaller square-footage specialty store deliveries are up 4.8 percent. 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Q Q Q Q Q Q Q Q Q Q Source: JLL Research, CoStar 36

37 In order to compete, retailers are incorporating technology into their build-outs. New omni-channel retail outlets combine brick-and-mortar stores with online stores. Retailers often use brick-and-mortar stores to fulfill online sales, which emphasizes convenience for the consumer. This new form of retail requires brick-and-mortar stores to bring in new technology, including interactive screens in dressing rooms and the opportunity to shop in-store, yet order online. Textures, finishes, and other unique touches also draw in today s consumer this includes exposed beams and locally harvested materials. Flexible space that includes gathering places and outdoor seating is gaining in popularity as well, driven by demand for unique shopping and dining experiences. Source: JLL Research 37

38 Retail costs have the largest price range, due to size and stock quality variances. ($ p.s.f.) $300.0 Range of retail construction costs in major markets $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 38

39 The majority of new retail space is focused in the Northeast and Florida, with some Midwestern growth. 1.6 Boston 0.4 Los Angeles 0.4 Las Vegas 0.5 Minneapolis 0.7 St. Louis 0.8 Chicago 0.4 Indianapolis 0.4 Northern NJ 0.7 Washington, DC 1.0 Long Island 0.7 New York City Q under construction 0.6 SW Florida 0.5 Broward Co. Florida s growth is driven by increased consumer confidence, growth in tourism and a recovering housing market. 0.5 Miami Source: JLL Research 39

40 Overview and outlook

41 Key construction markets 1. Houston continues to lead the pack, with 11.1 million square feet under construction in Q However, this represents a 12 percent decline of activity since Q1 2015, as the energy construction boom loses steam. 2. Boston and Long Island see retail growth. The Northeast and Florida represent the most retail construction growth by square foot in Q2, as the economic engine boosts demand in these regions. 3. The Midwest and the Southwest lead in available office space. As companies scoop up vacant space in primary markets, secondary markets still have higher vacancy rates, which provide opportunities for firms looking for new space. 4. New York City remains the most expensive market, driven by high labor costs and land supply constraints, while demand for NYC office space continues to grow. 5. Chicago had the biggest cost growth YOY, as land available declines while demand in the city increases. Source: JLL Research 41

42 What s next for construction? Construction costs continue to grow, despite a brief slowdown in materials cost. Materials costs are projected to rebound, however, further driving up costs. Construction deliveries saw a dip in Q2 2015, due to winter weather and other supply factors, but starts are at their highest point since the recession. 3. Labor costs see no reprieve from growth, and the cost differential between markets remain high, with Southern states boasting consistently low labor costs Tenant improvement demand will stay high, as companies continue to scoop up vacant property in growing primary and secondary markets and build out offices to fit shifting trends. As construction activity grows, TI allowances increase as well as landlords battle to attract occupiers; now is a good time for occupiers to lease new space. Activity is still far below pre-recession highs, indicating growth will continue over the next several years, and dollar value of TI allowances will as well. 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 42

43 Dana Westgren Research Analyst Project and Development Services +1 (312) Thank you COPYRIGHT JONES LANG LASALLE IP, INC. 2015