- Office space under construction peaked at 92.8 million square feet.
- Industrial construction was the shining star as consumer confidence grew.
- Construction costs increased in primary office markets, driven by skyrocketing labor costs, which motivated growth in secondary markets.
JLL’s Construction Outlook report provides valuable insight into construction trends in the U.S. and JLL San Diego’s PDS Market Lead, Julie Kilpatrick, shares her view on construction activity in the San Diego market.
Primary tech markets, like San Francisco and Silicon Valley, will continue to sport some of the highest construction costs nationwide, thanks to high demand as the economy continues to become more tech-focused. There will be an increase in office construction demand for secondary tech markets, like Chicago and Austin, in 2016.
Due to the record year in 2015, San Diego has seen a large growth in its construction backlog to a level not seen before 2008. California Green Code changes and lots of tenants up for renewal are pushing permit times up while the design and engineering community are in the unique position of turning work down.
Renovation activity reached new heights in 2015, thanks to a push for sustainable office development focused on attracting and retaining millennial talent, while enhancing corporate social responsibility. This push for new build outs was not limited to office spaces, with retail and industrial developers redeveloping existing space to include new technology and engage consumers in unique ways. This trend will continue in 2016.
Many institutional owners and landlords are repositioning older assets to attract millennials with greater flexibility in office space and how they work, closer to amenities and nearer geographically co-located to non-traditional innovation centers like San Diego vs San Francisco.
Because of these conditions, San Diego has seen an increase in construction pricing as the existing labor pool and subcontractor pools are at capacity and commodities prices remained slightly higher than average at the conclusion of last year.
Construction costs grow due to wages, despite plateau in materials
What’s next for construction?
Increase in starts in 2016 will continue, but at a lower rate. General economic growth nationwide has slowed, and the construction industry will be no different. However, demand from downstream markets will stay strong and construction profit margins will continue to grow, keeping construction growing at a faster rate than the overall economy. However, developers are starting to become wary and will be careful in starting projects, especially in single-industry markets.
Now is a good time to dive in and secure your next space for driving collaboration and attracting and retaining emerging talent. Renewal cycles will continue to increase going into 2016 and the market will tighten.
To find out more about the construction activity outlook for 2016, read the full report here.
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