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Construction of Commercial Real Estate on the Rise in 2015

03/16/2015

According to the latest Consensus Construction Forecast from the American Institute of Architects (AIA), values of non-residential real estate should increase at a modest to moderate pace within the next two years.

Breakdown of Construction Monitoring

In the December conducted consensus, building activity throughout the country specific to non-residential real estate was on the rise. In order to monitor activity of construction efficiently, bi-annual forecasts are run. As part of the panel are up to eight professionals who provide topline forecasts for activity of non-residential construction. From there, the information is broken down into three segments to include commercial, industrial, and institutional.

  • Commercial – Hotels, offices, retail shops, and other commercial properties such as banking institutes

 

  • Industrial – Manufacturing facilities and related facilities for distribution

 

  • Institutional – Not-for-profit ownership or government to include education, health, public safety, recreation, amusement, and religious

Based on the most recent information gathered and analyzed, experts predict that non-residential construction overall will be up 7.7 percent this year but next year, it is expected to rise even more, to 8.2 percent. However, this year the commercial segment is expected to see an 11.8 percent increase, followed by industrial at 10.5 percent and institutional 5 percent.

Variances per Geographic Region

As announced by Kermit, commercial real estate construction varies from one geographic region to another.

  • West – Historically , areas in the West have the greatest activity and in fact, throughout the economic recovery following the recession, these regions have experienced the largest overhang, meaning they had significant declines because of little to no activity. The good news is that these areas, as well as others, are in a healthy recovery mode and for many, strong growth is being reported. While California is doing well, some inland and coastal areas are still in catch-up mode.

 

  • Midwest and Northeast – Both of these geographic regions are considered somewhat more stable, not only during the recession but also recovery period

 

  • Southwest – Many states in this region are doing well but for non-residential construction, Texas is leading the way

 

  • South – Most states in the South region have a lot of commercial construction products at this time

 

  • Southeast – Florida and Georgia are taking longer to catch up, primarily because these states were hit extremely hard during the recession

 

  • West – Healthy growth is being seen in California for commercial construction although some inland and coastal areas are slower because they too were hit hard

One concern has to do with overbuilding. Compared to where the market was at its last peak it remains slightly low, meaning it will take time for commercial construction to catch up and reach a new peak. For the most part, imbalances will occur from market-to-market but overall any issues relating to overbuilding should be minor. Some of the specific improvements include:

  • Total dollars spent has risen almost 10 percent within the past year
  • In the last year, industrial vacancy has dropped by nearly a percentage point
  • Construction for manufacturing facilities has jumped almost 8 percent
  • Retail vacancy declines are slowing down
  • Hotels now have substantially higher occupancy while average room rates have increased 3 percent
  • Repayment of debt by owners of commercial real estate has improved
  • Interest rates for commercial mortgage loans have recovered somewhat
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