Construction costs will remain high despite the decline in oil prices.

Transcription

1 Construction costs will remain high despite the decline in oil prices. United States Construction Perspective Q1 2015

2 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.

3 National economic trends

4 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 $ % $60 $40 $20 $0 April March February January December November October September August July Source: JLL Research, U.S. Energy Information Administration 4

5 GDP growth slowed in 2015, despite positive expectations from economists. 10.0% Overall real GDP growth Construction component growth Overall GDP growth in Q1 2015, 0.2% far below expectations. 5.0% (Q-o-Q change) 0.0% -5.0% Construction GDP has increased more quickly than overall GDP since % -15.0% Source: JLL Research, Bureau of Economic Activity 5

6 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 Both construction unemployment and overall unemployment have seen approximately 0.0 percent growth in 2015, as labor participation rates continue to decline Overall employment (number of employees) Source: JLL Research, Bureau of Labor Statistics

7 Construction unemployment rates rose in early Q1 2015, resting above Q totals. This could be due to an extreme winter, which caused a break in construction activity (%) Construction Overall 5.6% Overall unemployment rate March % Construction unemployment rate March Source: JLL Research, Bureau of Labor Statistics 7

8 The Architecture Billings Index began to grow again in March, as more projects enter the design phase in spring The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 11 months ABI was 51.7 in March, as the ABI rebounds from early 2015 declines Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge 8

9 The Construction Backlog Index dipped slightly in Q Despite this decline, CBI rests 4.4 percent higher than Q4 2013, meaning 2015 will be another strong year for construction starts. CBI 1.3% q-o-q. CBI 0.1% q-o-q. CBI -21.2% q-o-q. This decline can be attributed to issues in West Coast ports, related economic uncertainty, and a sharp decline in public construction. CBI 3.5% q-o-q. 8.7mos National average construction backlog Source: JLL Research, Associated Builders and Contractors 9

10 Cost trends: Labor and materials

11 The value of nonresidential construction is rebounding since 2011 lows, as demand for new construction grows. ($M) $450,000 Value construction put-in-place February y-o-y $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ r 2015r Source: JLL Research, U.S. Census 11

12 Construction spend in most major sectors is increasing, though healthcare spend continues to decline. Total spend Q 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 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

13 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 CCI: 20-city average of common labor rates plus material inputs Nat'l CCI Materials Index Labor Index Common labor index: Union wage plus fringe benefits Source: JLL Research, ENR 13

14 Costs have increased in all major markets, with the biggest cost growth in San Francisco: 6.0 percent year-over-year Cost of construction in major markets RLB Comparative Cost Index tracks the bid cost of construction, including: labor, materials, contractor, and overhead costs Source: JLL Research, RLB Boston Chicago Denver Los Angeles New York Phoenix Portland San Francisco Seattle Washington, DC 14

15 Want to save money on construction costs? Build in the South. Cities with more land availability and lower labor costs maintain lower overall prices ENR labor cost index by city Common Labor Index 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 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

16 Material Price Index indicates continued growth in costs 3500 Materials Index 3300 Weighted price movement of steel, cement, and lumber Materials costs grew just 1.5% from 2014 and ENR Materials Price Index tracks weight price movement of structural steel, portland cement, and 2x4 lumber. Source: JLL Research, ENR 16

17 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% 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. Lumber/Softwood 4.0% Plywood 2.1% PVC Water Pipe 2.8% Ready-Mix Concrete -0.2% -0.4% price decline in March 2015 Sheet Metal 2.2% Source: JLL Research, ENR 17

18 Decline in diesel fuel cost will not decrease the overall value of construction, but some sectors will contract as a result. 0.0% Annual percent change in diesel fuel prices: Monthly July August September October November December January February -5.0% -10.0% -15.0% 10% Projected increase of construction put in place value, despite downturn in prices % -25.0% -30.0% Energy price declines will disproportionately affect manufacturing: the sector may decline 25 percent over the next year % -40.0% -45.0% Source: JLL Research, ENR 18

19 Construction starts and put-in- place

20 Q office starts are down from Q1 2014, though still well above 2012 levels, indicating demand for new stock is still high. Q m.s.f. Q Q Q m.s.f m.s.f m.s.f. Source: JLL Research, CoStar, McGraw Hill 20

21 Office vacancy rates held steady in Q1, but will decline in 2015 as corporate expansions absorb space. 17.5% Office vacancy rates 17.0% 16.5% Vacancy in Q sat at 15.6 percent, should drop to below 15.0 percent by end of year. 16.0% 15.5% 15.0% 14.5% Q Q Q Q Q Q Q Q Q Source: JLL Research 21

22 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 50,000 Source: JLL Research, Census Bureau 22

23 Office and industrial construction continue to rise, despite oil prices slowing the building surge in Houston. Office construction Q Industrial construction Q m.s.f. under construction 86.8 m.s.f. under construction Q m.s.f. under construction Q m.s.f under construction Q Retail construction Q m.s.f. under construction Q m.s.f. under construction Source: JLL Research, CoStar Group 23

24 Office completions in 2015 are twice the amount of Q1 2014, as 2014 s starts are delivered to the market. 140,000, ,000,000 Annual completions (s.f.) 100,000,000 80,000,000 60,000,000 40,000,000 Q Completion totals: 8.7 m.s.f. vs. Q1 2014: 4.3 m.s.f. 20,000, Q12015 Source: JLL Research 24

25 The amount of vacant sublease space nationally has declined, as firms begin scooping up empty, prime subleases. Sublease space (s.f.) 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 Despite the decline nationally, energy-rich markets have seen a huge jump in sublease space available. Houston has seen 3.0 of new sublease space enter the market since January ,000,000 40,000,000 30,000, Source: JLL Research 25

26 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 ($/bbl) Houston Office Market Avg. Rental Rates ($/SF/YR Class A) $40.00 WTI Spot Price $ $ $80.00 $60.00 $35.00 $30.00 Houston average $/s.f. rent $40.00 $25.00 $20.00 $0.00 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q YTD 2015 YE 2015 $20.00 Source: JLL Research 26

27 Portland, Seattle, and Washington DC have the most uniform and lowest office construction costs of all markets. ($ 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 Phoenix has the lowest construction cost thanks to available land and low-cost labor. New York Phoenix Portland San Francisco Seattle Washington DC Source: JLL Research, Rider Levett Bucknell 27

28 Office construction is seeing rapid growth nationally, particularly in the Southeast and Northwest, while it has slowed in Houston and the Northeast Seattle 3.13 M.S.F San Francisco 2.07 Portland 2.34 Denver 3.13 Chicago 3.84 Philadelphi a 2.13 DC 7.2 M.S.F New York City 5.08 M.S.F Boston 1.62 San Diego 3.66 Phoenix 7.14 Dallas Houston 1.62 Atlanta 1.57 Charlotte The dollar value for construction starts in Georgia is up 13 percent. Q under construction Source: JLL Research 28

29 Industrial completions in Q grew 27 percent from Q (s.f) 450,000, ,000, ,000,000 Annual completions 300,000, ,000, ,000, ,000, ,000,000 50,000, Q Source: JLL Research, CoStar 29

30 Consumer confidence is increasing as oil prices decline, spurring firms to invest in growing warehouse and e-commerce space.. ($B) $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 U.S. total warehouse construction put-in-place 2.5 points Consumer Confidence Index Source: JLL Research, US Census 30

31 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

32 Industrial square footage under construction is growing in the South, Northeast, and West, and slowing in the Midwest. 3.8 Seattle 3.3 East Bay 3.6 Los Angeles 20.1 Inland Empire 2.6 Phoenix 13.9 Dallas 8.7 Chicago 3.8 Indianapolis 18.9 Atlanta 13.3 Philadelphia 3.1 Charlotte 1.8 Baltimore 3.2 M.SF. Central NJ Inland Empire under construction increased 50% since Q Houston Q under construction Source: JLL Research 32

33 Retail deliveries are down, as consumer activity floundered in the colder months; increased consumer confidence in the spring will spur development. 300,000,000 Historical Retail Deliveries Annual completions (s.f.) 250,000, ,000, ,000, ,000,000 Starts are down, from 12.5 MSF delivered in Q to 9.5 MSF in Q ,000, Q Source: JLL Research, CoStar 33

34 Despite lower oil prices a shortage in trucker employment keeps delivery costs high. Wages and employment in trucking industry Average hourly wage $23 $23 $22 $22 $21 $21 $20 Wages Employment 1,500 1,450 1,400 1,350 1,300 Thousands of Employees $20 1,250 $19 $19 1,200 $ ,150 Source: JLL Research 34

35 San Francisco and Los Angeles have the highest-price prime retail construction cost; Denver remains the lowest cost. ($ 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 35

36 Significant retail square footage is under construction in the South, Northeast, and Southern California markets. 0.3 Seattle 1.6 Boston 0.3 San Francisco 1.6 Los Angeles 1.0 Orange County 0.7 Denver 3.5 Dallas 2.1 Chicago 0.5 Atlanta 0.7 Philadelphia 1.2 DC 1.0 New York City Source: JLL Research Retail demand will increase as consumer confidence grows across Houston Q under construction 0.62 Tampa 36

37 Overview and outlook

38 Key construction markets 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. San Francisco s office market is growing and expensive. Vacancy rates have declined almost 1.0 percent since Q as demand for trophy space skyrockets. At the same time, San Francisco has seen the largest growth in construction costs across Q1. 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 Q as companies cash in on the region s growth. New York City remains the most expensive market, driven by high labor costs and demand. 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

39 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 In some markets, replacement costs are lower than purchase prices, meaning constructing new space is more cost-effective than renting existing space. 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

40 Dana Westgren Research Analyst- Industry, Project and Development Services tel Thank you Copyright 2015 Jones Lang LaSalle