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JLL Outlook: Construction Industry Emerges from Downturn Leaner, More Diverse

Overbuilding Is No Longer a Hallmark of Shift From Recovery to Expansion - At Least So Far
December 10, 2013
The U.S. commercial construction sector is finally emerging from its long slumber since late 2009 as a reshaped, more diversified industry, with less risk build by developers and revived capital funding for new projects, according to Jones Lang LaSalle’s 2013 Construction Outlook.

"The construction industry has evolved significantly in the last five years," said Todd Burns, president of JLL’s Project & Development Services group for the Americas. "In particular, commercial construction is now characterized by an absence of overbuilding coupled with a diverse focus that is less dependent on residential housing.

Growth in sectors such as health care, retail, distribution and lodging has shaped a more stable industry in the long-term, the report states.

Cautious optimism is the prevailing sentiment among industry leaders in fourth-quarter 2013, based on three key industry indicators.

The Dodge Momentum Index, which tracks projects in planning stages, jumped 11.1% in August from the second quarter of 2013.

The American Institute of Architects (AIA) Architecture Billings Index reached 52.7 and regained momentum lost during the first quarter of 2013. The Construction Backlog Index (CBI) also demonstrated steady improvement, rising to 8.2 months of contractor backlog.

Four trends are helping -- and in some cases, hindering --construction growth in the current economic cycle, according to the JLL report.

  • Financing is back, and echoing the healthy activity in construction spending, commercial lending conditions are improving even as lending standards have remained stagnant. In 2009, frenzy of overheated lending drove record construction starts in the wake of the 2008 global financial crisis. By 2009, construction lending froze as banks scrambled to reduce risks.

    The low cost of capital and re-emergence of the CMBS market have enabled both increased liquidity and easier lending. New CMBS issuance totaled $50.8 billion through the beginning of August, twice the level of 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 CRE loans in the third quarter of 2013 compared to the second quarter, the biggest improvement in demand in more than a decade.

  • Construction has become more expensive, with costs outpacing the recovery in most of the country. The booming single-family home sector has resulted in rising construction costs for CRE as well, including an increase in the cost of labor. According to Rider Levett Bucknall’s Construction Cost Index, the cost of construction increased 3.6% this year, compared to a 1.5% increase this time last year.

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

  • All buildings are green buildings, and the best buildings are both green and smart. During the downturn, green building features were incorporated upon request but were generally viewed as expensive luxuries. Now, sustainable features are viewed as table stakes by owners and developers.

    LEED Version 4 formally launched last month and introduced new changes to enhance green building standards, with new provisions including expanding property type-specific designations, weighing points more heavily on optimizing energy performance. The new LEED also includes a "cradle to cradle" component seeking to ensure that the products and resources used during construction are safe and designed for recycling or composting.

  • Much-needed infrastructure updates and rebuilding in the wake of severe storms such as Super Storm Sandy are driving construction recovery in many regions. During the downturn, demand for construction came primarily from private-sector economic expansion.

    That said, few funds are available to states for new projects. As a result, public-private partnerships are emerging where public funding is limited. Natural disaster reconstruction remains top of mind for construction executives on the one-year anniversary of Sandy as climate analysts predict more frequent volatile storms in the future.

    "While there is a steep learning curve associated with managing storm recovery and large-scale infrastructure projects now, construction firms who invest the time and resources to be successful in this sector will be well-positioned for growth in the future," Roe said.

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