Post on 15-Apr-2017
Construction activity grows, and tenant improvement allowances follow suit
United States
Construction Perspective
Q2 2015
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.
National economic trends
GDP growth slowed in 2015, mirroring similar Q1 declines since
recovery began in 2009.
-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
Con
trib
utio
ns to
per
cent
cha
nge
in r
eal G
DP
(S
AA
R)
4
Decline in real GDP reflected negative
contributions from exports, nonresidential fixed
investment and drops in government spending.
Source: JLL Research, Bureau of Economic Analysis
600
620
640
660
680
700
720
740
122,000
124,000
126,000
128,000
130,000
132,000
134,000
136,000
138,000
140,000
142,000
144,000
2010 2011 2012 2013 2014 2015
Construction
Overall
After a drop in the winter, construction employment is increasing
as starts rebound for the spring.
5
Source: JLL Research, Bureau of Labor Statistics
Con
stru
ctio
n em
ploy
men
t (n
umbe
r of
em
ploy
ees)
Overall em
ployment (num
ber of employees)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2008 2009 2010 2011 2012 2013 2014 2015
Overall
Construction
Construction unemployment has declined 20 percent year-over-
year since June 2014, as construction demand grows.
6
Source: JLL Research, Bureau of Labor Statistics
5.5% Overall unemployment rate
June 2015
6.3% Construction unemployment rate
June 2015
Une
mpl
oym
ent r
ate
(%)
20
25
30
35
40
45
50
55
60
The Architecture Billings Index (ABI) slipped in Q2, continuing
the cyclical trend since the recovery.
7
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
Driven by weather in the Northeast and the West Coast port
slowdown, the Construction Backlog Indicator declined sharply.
8
This index still rests 4.4 percent higher than Q2 2014.
Source: JLL Research, Associated Builders and Contractors
-25.3% q-o-q
5.9% q-o-q C
BI
-10.2% q-o-q
CB
I
-0.7% q-o-q
CB
I
CB
I
National average
construction backlog
8.4mos
Cost trends: Labor and materials
Nationwide, TI packages are growing as landlords compete to
attract clients and more stock comes to the market.
10
Q2 2015 average TI allowance has eclipsed 2010 highs.
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Average TI package (per square foot) 14.2 percent Growth in TI Allowance
from Q2 2013 lows
Source: JLL Research
The markets with the highest average TI package also have high
levels of construction activity.
11
Landlords offer higher dollar-value packages in active markets in order to stay competitive.
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
Washington,DC
Atlanta New York -Midtown
New York -Downtown
Seattle Chicago Boston Denver FairfieldCounty -
Greenwich
Minneapolis
Average TI package CBD (per square foot)
CBD
Average:
$50.69
D.C. also saw the most
construction starts in Q2
– three starts at 439,394
square feet
Many of the most expensive markets for office construction also
lead the pack for tenant improvement cost.
12
Source: JLL Research, RS Means
0
20
40
60
80
100
120
140
2012
2013
2014
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.
RS
Mea
ns C
ost I
ndex
Buildout costs per market
The increase in TI packages gives occupiers the opportunity for
more customized buildouts, despite high costs.
13
Source: JLL Research, RS Means
28%
15%
9% 7%
6%
6%
4%
3%
3%
3%
3%
2%
2% 1% 8%
Percentage of total materials cost
Electrical
HVAC
Drywall
Ceilings
Flooring
Millwork
Demolition
Fire Protection
Voice Data
Glass & Glazing
General Conditions
Paints & Coatings
Audio-Visual
General Clean Up
Other
$19.46 Electrical cost per square foot
0
5000
10000
15000
20000
25000
30000
0
1000
2000
3000
4000
5000
6000
7000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
National Building ConstructionIndexMaterials Index
Labor Index
Construction costs continue to increase, despite slight dip in
materials cost year-over-year.
14
Labor cost grew 1.4 percent since December 2014.
Source: JLL Research, ENR
Com
mon labor index: U
nion wage plus fringe benefits
BC
I: 20
-city
labo
r an
d m
ater
ials
cos
t ave
rage
inde
x
The value of nonresidential construction put in place is over
$40,000 more than in May 2014.
15
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014r 2015r
Value construction put in place
Source: JLL Research, U.S. Census
Non
resi
dent
ial p
ut in
pla
ce (
$M)
The value of construction put in place continues to grow across
all major sectors, as project spend increases.
16
Source: JLL Research, U.S. Census
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
Office $46.1 billion $55.4 billion
Healthcare $38.4 billion $39.1 billion
Amusement/Recreation $16.6 billion $21.4 billion
Manufacturing spend
eclipsed education to take
the top spot nationwide.
0
5000
10000
15000
20000
25000
New York Boston SanFrancisco
Chicago Washington,DC
Los Angeles Seattle Portland Denver Phoenix
Apr-14
Apr-15
Costs have increased in all major markets, with the biggest cost
growth in San Francisco: 6 percent year-over-year.
17
Cost of construction in major markets
Source: JLL Research, RLB
RLB Comparative Cost Index
tracks the bid cost of
construction, including labor,
materials, contractor and
overhead costs.
RLB
Com
para
tive
Cos
t ind
ex
Rates of growth are increasing in many markets, though Boston,
NYC and Portland are seeing rate declines.
18
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
Boston Chicago Denver Los Angeles New York Phoenix Portland SanFrancisco
Seattle Washington,DC
Q2 2014
Q2 2015
Change in construction cost QOQ
Source: JLL Research, RLB
Materials prices are increasing, though rates of increase are
declining.
19
Source: JLL Research, ENR
ENR Materials Price Index tracks weight price movement of structural steel, Portland cement and 2x4 lumber.
Wei
ghte
d pr
ice
mov
emen
t of s
teel
, cem
ent a
nd lu
mbe
r
1500
1700
1900
2100
2300
2500
2700
2900
3100
3300
3500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Materials Index
1.7 percent YOY growth in materials cost
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%
20
Source: JLL Research, ENR
• 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 low-
level increases as the market struggles with
over saturation of supply.
0
5000
10000
15000
20000
25000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor Index
Labor costs continue growth, though at a lower level than in
previous years.
21
Source: JLL Research, ENR
As employment in the construction sector
continues to grow, wages should stop rising and
stay steady in the future.
Com
mon
labo
r in
dex:
Uni
on w
age
plus
frin
ge b
enef
its
Costs remain low in Southern states, while states with a large
union presence remain pricier.
22
Source: JLL Research, ENR
0
5000
10000
15000
20000
25000
30000
35000
40000ENR labor cost index by city
Com
mon
labo
r in
dex:
Uni
on w
age
plus
frin
ge b
enef
its
Construction activity
Q2 2015 starts are at the highest point since the downturn, as the
economic recovery continues.
24
Source: JLL Research, CoStar, McGraw Hill
11.5 m.s.f. 14.1 m.s.f. 19.4 m.s.f.
Q2 2012
12.1 m.s.f.
Q2 2013 Q2 2014 Q2 2015
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Com
plet
ions
(s.
f.)
Average completions
46.0 m.s.f.
Though office construction is rebounding from 2012 lows,
activity is still below historical norms.
25
Source: JLL Research
Historical construction completions
Despite a slowdown in the winter months, construction in office
and industrial is up year-over-year.
26
Source: JLL Research, CoStar Group
Industrial construction
Retail construction
122.3 m.s.f. under
construction
Q1 2014
Q2 2015 Q2 2014 Q2 2015
158.8 m.s.f under
construction
61.6 m.s.f. under
construction
45.3 m.s.f. under
construction
Q2 2014 Q2 2015
Office construction
Q2 2014
86.3 m.s.f. under
construction
65.4 m.s.f. under
construction
Growth in retail
construction of
2 m.s.f since
Q1 2015
Office vacancies are slowly declining, as companies begin to
renovate and occupy older stock buildings.
27
Source: JLL Research
30,000,000
130,000,000
230,000,000
330,000,000
430,000,000
530,000,000
630,000,000
730,000,000
2011 2012 2013 2014 2015
Vac
ancy
(sq
uare
feet
)
-10.2 percent since Q2 2011
The most available office space is in the Midwest and South, as
vacancy tightens nationwide.
28
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Wes
ches
ter
Cou
nty
Pho
enix
Cle
vela
nd
Cin
cinn
ati
St.
Loui
s
San
Ant
onio
Dal
las
Indi
anap
olis
Atla
nta
Los
Ang
eles
Wes
t Pal
m B
each
Kan
sas
City
Jack
sonv
ille
Sili
con
Val
ley
Milw
auke
e
Mia
mi
Min
neap
olis
Sac
ram
ento
Det
roit
San
Die
go
Ric
hmon
d
Hou
ston
Col
umbu
s
Orla
ndo
Bal
timor
e
For
t Lau
derd
ale
Chi
cago
Tam
pa
Den
ver
Ral
eigh
/Dur
ham
Pitt
sbur
gh
Was
hing
ton
DC
Bos
ton
Phi
lade
lphi
a
Aus
tin
Sal
t Lak
e C
ity
San
Fra
ncis
co
New
Yor
k C
ity
Eas
t Bay
/Oak
land
Sea
ttle
Cha
rlotte
Por
tland
Vacancy rates by CBD
Source: JLL Research
Q2 2015 completions are up 60 percent from Q2 2014, despite the
winter building decline.
29
Source: JLL Research
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Ann
ual c
ompl
etio
ns (
squa
re fe
et)
New York, San Francisco and Chicago have a wide cost variance
in their submarkets, giving them wider cost ranges overall.
30
Source: JLL Research, Rider Levett Bucknell
$0
$50
$100
$150
$200
$250
$300
$350
$400
Boston Chicago Denver Los Angeles New York Phoenix Portland SanFrancisco
Seattle WashingtonDC
($ p.s.f.) Range of office construction costs in major markets
4.5 m.s.f.
Boston
The square footage of office space under construction declined
country-wide in Q2, due in part to severe springtime weather.
31
Source: JLL Research
8.5 m.s.f. Dallas
7.0 m.s.f.
Seattle
1.4 m.s.f.
Portland
3.1 m.s.f. San
Francisco 2.0
m.s.f. Cincinnati
3.66 m.s.f.
Phoenix
3.1 m.s.f.
Denver
11.1 m.s.f.
Houston
2.3 m.s.f.
Chicago
2.9 m.s.f. Austin
9.5 m.s.f. New
York City
2.13 m.s.f.
Washington,
DC
3.8 m.s.f.
Philadelphia
0.5 m.s.f.
Atlanta
Q2 2015 under construction
Despite the general decline in
square footage under
construction, New York saw
construction activity increase
by nearly 2 million square
feet.
Tenant improvements become more vital as occupiers customize
newly acquired space and attract millennial workers.
32
Source: JLL Research
36
percent
50
percent
The percentage of
millennials in the
workforce will increase by
almost 20 percent
between 2014 and 2020.
Companies must work
harder to attract and retain
top talent.
2014
2020
• 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.
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
2010 2011 2012 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Industrial completions in Q2 2015 are up 13.9 percent year-over-
year, as many of the 2014 starts come onto the market.
33
Source: JLL Research, CoStar
Indu
stria
l Com
plet
ions
(sq
uare
feet
)
Industrial construction cost ranges are the largest in California,
with very little cost differential in the East Coast.
34
Source: JLL Research, Rider Levett Bucknell
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
$180.0
Boston Chicago Denver Los Angeles New York Phoenix Portland SanFrancisco
Seattle WashingtonDC
($ p.s.f.) Range of warehouse construction costs in major markets
24.4 m.s.f. Inland Empire
6.7 m.s.f. Reno
3.0 m.s.f.
East Bay
Industrial square feet under construction is growing, especially in
the South and West.
35
Source: JLL Research
13.0 m.s.f. Dallas
3.1 m.s.f. Seattle
3.8 m.s.f. Los
Angeles
4.5 m.s.f.
Central valley
3.3 m.s.f.
Indianapolis
10.1 m.s.f.
Houston
8.9 m.s.f.
Chicago
4.2 m.s.f.
Kansas City
17.3 m.s.f. Atlanta
2.9 m.s.f.
Charlotte
14.6 m.s.f.
Philadelphia
Inland Empire under
construction increased 50
percent since Q4 2014. Q1 2015 under construction
3.0 m.s.f.
Cincinnati
Retail deliveries in 2015 are below 2014 totals, as smaller square-
footage stores increase in popularity.
36
Source: JLL Research, CoStar
Ann
ual c
ompl
etio
ns (
squa
re fe
et)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Retail deliveries Smaller square-footage specialty
store deliveries are up 4.8 percent.
In order to compete, retailers are incorporating technology into
their build-outs.
37
Source: JLL Research
• 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.
Retail costs have the largest price range, due to size and stock
quality variances.
38
Source: JLL Research
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
Boston Chicago Denver Los Angeles New York Phoenix Portland SanFrancisco
Seattle WashingtonDC
($ p.s.f.) Range of retail construction costs in major markets
The majority of new retail space is focused in the Northeast and
Florida, with some Midwestern growth.
39
Source: JLL Research
0.5 m.s.f.
Broward Co.
0.5 m.s.f.
Minneapolis
0.4 m.s.f. Las
Vegas 0.4
m.s.f. Los
Angeles
0.4 m.s.f.
Indianapolis
0.6 m.s.f. SW
Florida
0.7 m.s.f.
St. Louis
0.8 m.s.f.
Chicago
0.7 m.s.f.
Washington,
DC
1.0 m.s.f. Long Island
0.4 m.s.f.
Northern NJ
0.7 m.s.f.
New York City
1.6 m.s.f. Boston
Q2 2015 under construction
Florida’s growth is driven by
increased consumer confidence,
growth in tourism and a
recovering housing market. 0.5 m.s.f. Miami
Overview and outlook
Key construction markets
41
Source: JLL Research
Houston continues to lead the pack, with 11.1 million square feet under construction in Q2 2015. However, this
represents a 12 percent decline of activity since Q1 2015, as the energy construction boom loses steam.
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.
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.
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.
Chicago had the biggest cost growth YOY, as land available declines while demand in the city increases.
1.
2.
3.
4.
5.
What’s next for construction?
42
Source: JLL Research, IBISWorld
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.
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.
1.
2.
3.
4.
5.
COPYRIGHT © JONES LANG LASALLE IP, INC. 2015
Thank you
Dana Westgren
Research Analyst
Project and Development Services
+1 (312)-228-2867
Dana.Westgren@am.jll.com
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