Construction Spending Hits 7 Year High

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construction
John Robinson
Managing Director

According to the New York Times, commercial and residential construction has hit a post-recession high. With approx. $1 trillion per year in total spending, commercial construction accounts for almost one half with $450 billion estimated in 2015 spending.

The overall economy is growing at approximately 3% and construction spending is on pace at over 13% growth.

Why is this happening?
With continued growth of the economy and investors looking to not only diversify their holdings, but find superior returns, the strong real estate sector is attractive right now; I predict it will be for 3-5 more years during this cycle.  Interest rates are low and debt is very accessible, almost at pre-recession terms. Therefore, the barriers to entry into real estate are lower than they have been. On the commercial side, US companies are growing (office and industrial). Speculative office buildings, which haven’t been seen since 2008 are popping up in most markets across the US as well. Sourwine developed a three story 85,000 sf building in the Keystone Submarket which was the first spec building, post-recession. Rents are in the $21.50/sf full service and the building is approximately 80% leased. Next up was Concourse at Crosspoint by Edgeworth Laskey in the northeast submarket. Though still primarily empty, this 133,000 sf Class A building is on the shortlist for several large users. Last, but not least, PK Partners is under construction on the 90,000 sf, River North building. Preleasing has been brisk at nearly 50% pre-leased and rates are being advertised in the $25.50/sf full service range. The hotel, multi family, and government sectors are building at a brisk pace right now as well.

Why does this matter?
With the recession, we lost a very high percentage of construction companies. Now we have an increase in demand and fewer suppliers. Until, the suppliers catch up, the leverage in this market will shift to the general and sub-contractors.  If history repeats itself from the last time we were in this cycle, these companies will be more selective on the jobs they bid, take and complete. Owners who have paid slowly in the past or not at all, will fall to the bottom of the list. We will also see commodities become more scarce and thus go up in price and time to market. I do remember a drywall shortage in 2004/2005 that affected the completion date and pricing on many jobs. As of now we are seeing millwork products take 8-10 weeks which is already longer than normal. In summary, prices should rise over time and projects will take longer so beware of this as you plan.

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