Commercial Construction Surges as Demand Counters Higher Labor, Materials Costs
Robust commercial construction is projected to carry through the second half of 2018 and into next year, overcoming a shortage of skilled workers and any effects of tariffs on the cost of lumber, steel, and other building materials.
Total spending on new construction and engineering in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – is projected to rise six percent and surpass $1.3 trillion for the first time by the end of this year, exceeding the four percent increase for all of 2017, according to construction management and consulting firm FMI Corp. The gains will be powered by an almost 10 percent increase in transportation, residential, and office projects, FMI reports.
Building on that forecast, the Commerce Department recently reported total construction spending in the national and Philadelphia commercial real estate markets rose 0.4 percent in May from the previous month, with spending at a record $1.31 trillion on an annual basis. Multifamily construction jumped 1.6 percent in May, while single-family building rose 0.6 percent.
This report involving U.S. and Philadelphia commercial properties is being made through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.
“As we enter the dog days of summer, the weather isn’t the only thing getting hot. Construction spending is heating up just as much, about a 50 percent increase in total growth from last year,” said FMI Managing Director Jay Bowman. “What’s even more impressive is this will mark the seventh-straight year of growth since 2011, one of the longest sustained periods we’ve ever seen.”
About 150 million square feet of offices in the national and Philadelphia commercial real estate properties market were under construction as of June 30, up slightly from the 144 million square feet under way a year earlier, according to CoStar data. That’s more than the historical annual average of 126 million square feet under construction, the data show.
Nonresidential building starts were up 18 percent in May, boosted by transit projects in Los Angeles and Boston that each are valued at more than a $1 billion, and the start of a $1 billion Facebook data center expansion in Nebraska. Other large projects include the $764 million expansion of the Washington State Convention Center in Seattle and a $740 million airport terminal project at Salt Lake City International Airport, according to Dodge Data & Analytics.
Total new construction starts included among U.S. and Philadelphia commercial real estate listings rose 15 percent in May from the previous month to a seasonally adjusted annual rate of $783.6 billion, according to Dodge. The increase follows a 12 percent decline in April, with total construction activity reaching an eight-month high.
There are, however, signs of slowing for next year. Annual new office construction starts are declining and deliveries are forecast to peak this year. With supply largely in check with demand in most cities, average U.S. rents grew at roughly a 2 percent rate while occupancy hovered near 90 percent during the first quarter, according to CoStar Portfolio Strategy data.
Ken Simonson, chief economist for Associated General Contractors, warned growth in private nonresidential spending remains modest and inconsistent. Rising costs for materials and shortages of qualified workers “may stall all kinds of projects,” he said. The rising cost of steel and aluminum, which could stem from higher government tariffs may make some projects unaffordable, according to Associated General Contractors.
Even so, total construction spending in the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – is projected to increase by double digits in Nevada, Arizona, New Mexico, Missouri, Florida, Maryland, and Virginia in 2018, according to FMI’s Bowman. In addition, this spending is increasingly concentrated, with 20 U.S. markets representing half of all expenditures over the next five years. At the state level, California, Texas, Florida and New York comprise 50 percent of total construction spending.
Total spending next year in relation to both national and Philadelphia commercial real estate listings is forecast to increase at a slightly lower 5 percent, still well above the historical rate of inflation, Bowman said.
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