U.S. construction trends and outlook (Q1 2015)

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

United States Construction

Perspective

Q1 2015

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.

National economic trends

$0

$20

$40

$60

$80

$100

$120

July

August

Septem

ber

October

Novem

ber

Decem

ber

January

February

March

April

Crude Spot Price, Cushing OK

-52.2%

Crude oil is selling for half of its June 2014 value, as an

oversupply of crude hits the market.

4

($ per

barrel)

Source: JLL Research, U.S. Energy Information Administration

GDP growth slowed in 2015, despite positive expectations from

economists.

5

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%Overall real GDP growth

Construction component growth

Construction GDP has

increased more quickly than

overall GDP since 2012.

Overall GDP growth in Q1 2015,

far below expectations. 0.2%

Source: JLL Research, Bureau of Economic Activity

(Q-o

-Q c

hang

e)

122000

124000

126000

128000

130000

132000

134000

136000

138000

140000

142000

144000

4800

5000

5200

5400

5600

5800

6000

6200

6400

6600

2010 2011 2012 2013 2014 2015

Construction

Overall Employment

The steady expansion in construction employment since 2012

comes to an end as labor force participation declines.

6

Source: JLL Research, Bureau of Labor Statistics

Con

stru

ctio

n em

ploy

men

t (n

umbe

r of

em

ploy

ees)

O

verall employm

ent (number of em

ployees)

Both construction unemployment and

overall unemployment have seen

approximately 0.0 percent growth in 2015,

as labor participation rates continue to

decline.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2008 2009 2010 2011 2012 2013 2014 2015

Construction

Overall

Construction unemployment rates rose in early Q1 2015, resting

above Q4 2014 totals.

7

This could be due to an extreme winter, which caused a break in construction activity

Source: JLL Research, Bureau of Labor Statistics

5.6% Overall unemployment rate

March 2015

9.5% Construction unemployment rate

March 2015

(%)

The Architecture Billings Index began to grow again in March, as

more projects enter the design phase in spring 2015.

8

The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 11 months

20

25

30

35

40

45

50

55

60

ABI was 51.7 in

March, as the ABI

rebounds from early

2015 declines.

Source: JLL Research, American Institute of Architects, McGraw-Hill Dodge

The Construction Backlog Index dipped slightly in Q4 2014.

9

Despite this decline, CBI rests 4.4 percent higher than Q4 2013, meaning 2015 will be another

strong year for construction starts.

Source: JLL Research, Associated Builders and Contractors

-21.2% q-o-q.

3.5% q-o-q. C

BI

0.1% q-o-q. C

BI

1.3% q-o-q. C

BI

CB

I

National average

construction backlog

8.7mos This decline can be attributed to

issues in West Coast ports, related

economic uncertainty, and a sharp

decline in public construction.

Cost trends: Labor and materials

The value of nonresidential construction is rebounding since

2011 lows, as demand for new construction grows.

11

$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 February y-o-y

Source: JLL Research, U.S. Census

($M)

Construction spend in most major sectors is increasing, though

healthcare spend continues to decline.

12

Source: JLL Research, U.S. Census

Total spend Q1 2015 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 - 4.1 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

Construction costs are continuing to grow, despite the slowdown in

energy prices.

13

Source: JLL Research, ENR

The continued growth of labor costs in most major markets enhances overall construction cost

Com

mon labor index: U

nion wage plus fringe benefits

CC

I: 20

-city

ave

rage

of c

omm

on la

bor

rate

s pl

us m

ater

ial i

nput

s

0

5000

10000

15000

20000

25000

30000

0

2000

4000

6000

8000

10000

12000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Nat'l CCI

Materials Index

Labor Index

Costs have increased in all major markets, with the biggest cost

growth in San Francisco: 6.0 percent year-over-year.

14

0

5000

10000

15000

20000

25000

Boston Chicago Denver Los Angeles New York Phoenix Portland SanFrancisco

Seattle Washington,DC

2014

2015

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.

0

5000

10000

15000

20000

25000

30000

35000

40000 ENR labor cost index by city

Want to save money on construction costs? Build in the South.

15

Cities with more land availability and lower labor costs maintain lower overall prices

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.

Com

mon

Lab

or In

dex

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

Material Price Index indicates continued growth in costs…

16

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,

and

lum

ber

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

Materials costs grew just

1.5% from 2014 and 2015.

… with some notable exceptions, driven by a range of external

factors.

17

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%

Lumber/Softwood 4.0%

Plywood 2.1%

PVC Water Pipe 2.8%

Ready-Mix Concrete -0.2%

Sheet Metal 2.2%

• 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.

Source: JLL Research, ENR

-0.4% price decline in March 2015

Decline in diesel fuel cost will not decrease the overall value of

construction, but some sectors will contract as a result.

18

Source: JLL Research, ENR

-45.0%

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

July August September October November December January February

Annual percent change in diesel fuel prices: Monthly 2014-2015

Energy price declines will

disproportionately affect manufacturing:

the sector may decline 25 percent over

the next year.

10% Projected increase of

construction put in place

value, despite downturn

in prices.

Construction starts and put-in- place

Q1 2015 office starts are down from Q1 2014, though still well

above 2012 levels, indicating demand for new stock is still high.

20

Source: JLL Research, CoStar, McGraw Hill

13.4 m.s.f. 22.2 m.s.f. 20.8 m.s.f.

Q1 2012

11.6 m.s.f.

Q1 2013 Q1 2014 Q1 2015

21

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015

Office vacancy rates

Vacancy in Q1 2015 sat at 15.6

percent, should drop to below 15.0

percent by end of year.

Source: JLL Research

Office vacancy rates held steady in Q1, but will decline in 2015

as corporate expansions absorb space.

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000 Value of construction put-in-place

The dollar value of construction put-in-place has declined in Q1

2015, though it is still substantially higher than pre-recession

lows.

22

Source: JLL Research, Census Bureau

($M)

Office and industrial construction continue to rise, despite oil

prices slowing the building surge in Houston.

23

Source: JLL Research, CoStar Group

Industrial construction

Retail construction

122.8 m.s.f. under

construction

Q1 2014

Q1 2015

Q1 2014

Q1 2015 157.7 m.s.f under

construction

57.2 m.s.f. under

construction

43.0 m.s.f. under

construction

Q1 2014

Q1 2015

Office construction

Q1 2014

86.8 m.s.f. under

construction

22.2 m.s.f. under

construction

Office completions in 2015 are twice the amount of Q1 2014, as

2014’s starts are delivered to the market.

24

Source: JLL Research

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 Q12015

Ann

ual c

ompl

etio

ns (

s.f.)

Q1 2015 Completion

totals: 8.7 m.s.f. vs.

Q1 2014: 4.3 m.s.f.

The amount of vacant sublease space nationally has declined, as

firms begin scooping up empty, prime subleases.

25

Source: JLL Research

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

2009 2010 2011 2012 2013 2014 2015

Sub

leas

e sp

ace

(s.f.

)

Despite the decline nationally, energy-rich

markets have seen a huge jump in sublease

space available. Houston has seen 3.0 M.S.F.

of new sublease space enter the market since

January 2015.

Houston’s office rents dipped slightly as crude oil prices tanked,

though still rest above 2013 rates.

26

Source: JLL Research

$20.00

$25.00

$30.00

$35.00

$40.00

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

YT

D 2015

YE

2015

Houston average $/s.f. rent

WT

I Spo

t Pric

e

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)

Portland, Seattle, and Washington DC have the most uniform and

lowest office construction costs of all markets.

27

Source: JLL Research, Rider Levett Bucknell

$0

$50

$100

$150

$200

$250

$300

$350

$400

Boston Chicago Denver LosAngeles

New York Phoenix Portland SanFrancisco

Seattle WashingtonDC

($ p.s.f.) Range of office construction costs in major markets

Phoenix has the lowest

construction cost thanks to

available land and low-cost

labor.

5.08 M.S.F Boston

Office construction is seeing rapid growth nationally, particularly in

the Southeast and Northwest, while it has slowed in Houston and the

Northeast.

28

Source: JLL Research

7.14 M.S.F. Dallas

6.91 M.S.F. Seattle

2.07 M.S.F.

Portland

3.13 M.S.F San

Francisco

1.62 M.S.F.

San Diego

3.66 M.S.F.

Phoenix

2.34 M.S.F. Denver

12.59 M.S.F.

Houston

3.13 M.S.F.

Chicago

1.57 M.S.F.

Charlotte

7.2 M.S.F

New York City

2.13 M.S.F.

DC

3.84 M.S.F.

Philadelphi

a

1.62 M.S.F. Atlanta

The dollar value for

construction starts in

Georgia is up 13 percent.

Q1 2015 under construction

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q12015

Industrial completions in Q1 2015 grew 27 percent from Q4

2014.

29

Source: JLL Research, CoStar

Ann

ual c

ompl

etio

ns

(s.f)

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Consumer

Confidence Index

30

Source: JLL Research, US Census

Consumer confidence is increasing as oil prices decline, spurring

firms to invest in growing warehouse and e-commerce space..

($B) U.S. total warehouse construction put-in-place

2.5

points

Industrial construction costs remain lower than office.

31

Source: JLL Research, Rider Levett Bucknell

Highest cost stock is in Los Angeles and San Francisco, mainly due to land and labor costs

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

$180.0

Boston Chicago Denver LosAngeles

New York Phoenix Portland SanFrancisco

Seattle WashingtonDC

($ p.s.f.) Range of warehouse construction costs in major markets

20.1 M.S.F. Inland Empire

2.6 M.S.F.

Phoenix

3.3 M.S.F.

East Bay

Industrial square footage under construction is growing in the South,

Northeast, and West, and slowing in the Midwest.

32

Source: JLL Research

13.9 M.S.F. Dallas

3.8 M.S.F. Seattle

3.6 M.S.F.

Los Angeles

3.2 M.SF. Central

NJ 3.8

M.S.F. Indianapolis

6.3 M.S.F.

Houston

8.7 M.S.F.

Chicago

1.8 M.S.F.

Baltimore

18.9 M.S.F. Atlanta

3.1 M.S.F.

Charlotte

13.3 M.S.F.

Philadelphia

Inland Empire under

construction increased 50%

since Q4 2014. Q1 2015 under construction

Retail deliveries are down, as consumer activity floundered in the

colder months; increased consumer confidence in the spring will

spur development.

33

Source: JLL Research, CoStar

Ann

ual c

ompl

etio

ns (

s.f.)

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1 2015

Historical Retail Deliveries

Starts are down, from 12.5

MSF delivered in Q1 2014 to

9.5 MSF in Q1 2015.

1,150

1,200

1,250

1,300

1,350

1,400

1,450

1,500

$18

$19

$19

$20

$20

$21

$21

$22

$22

$23

$23

2007 2008 2009 2010 2011 2012 2013 2014

Wages Employment

34

Source: JLL Research

Despite lower oil prices a shortage in trucker employment keeps

delivery costs high.

Wages and employment in trucking industry

Ave

rage

hou

rly w

age

Thousands of E

mployees

San Francisco and Los Angeles have the highest-price prime

retail construction cost; Denver remains the lowest cost.

35

Source: JLL Research

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

Boston Chicago Denver LosAngeles

New York Phoenix Portland SanFrancisco

Seattle WashingtonDC

($ p.s.f.) Range of retail construction costs in major markets

Significant retail square footage is under construction in the

South, Northeast, and Southern California markets.

36

Retail demand will increase as

consumer confidence grows

across 2015.

Source: JLL Research

3.5 M.S.F. Dallas

0.3 M.S.F. Seattle

0.7 M.S.F. Denver

0.3 M.S.F.

San Francisco

1.6 M.S.F.

Los Angeles

1.0 M.S.F. Orange County

0.5 M.S.F. Atlanta

1.7 M.S.F.

Houston

2.1 M.S.F.

Chicago

0.62 M.S.F. Tampa

1.0 M.S.F.

New York City

1.2 M.S.F.

DC

0.7 M.S.F.

Philadelphia

1.6 M.S.F. Boston

Q1 2015 under construction

Overview and outlook

38

Source: JLL Research

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

Q4 2014 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 Q1 2015 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.

1.

2.

3.

4.

5.

Key construction markets

39

Source: JLL Research, IBISWorld

Construction costs continue to grow, even as starts begin to slow across most major markets.

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.

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.

1.

2.

3.

4.

5.

What’s next for construction?

© Copyright 2015 Jones Lang LaSalle

Thank you

Dana Westgren

Research Analyst- Industry, Project and Development Services

tel +1 312-228-2867

[email protected]