The success of commercial construction in 2016 has been boosted primarily from the multifamily, office and lodging sectors. Private non-residential construction and all commercial property types have experienced year-over-year increases of 7.0 percent and 8.1 percent, respectively. The low interest rates in the U.S. and abroad continue to increase foreign investment in new construction, leading to low cap rates in these sectors. Nonetheless, experts believe the construction industry to be gradually improving, relative to the expected recovery after the 2008 economic downturn.
Driving much of the excitement around new development lies in the effect of technology. Retailers typically focused on investing in ‘brick-and-mortar’ properties are now seeking investments in warehouse properties and supply chain infrastructure to satisfy the demands of e-commerce. The development of industrial property is genuinely specific to markets with high population centers and well-developed infrastructure. Thus, locations such as Oregon, Utah, Maryland, and California are undergoing growth in industrial construction.
Furthermore, office construction is experiencing growth as a result of strong employment in the U.S., which has added over 2.4 million jobs this past year. Estimates for new office space in 2016 fall between 70-73 million sq. ft. The expanding gap between successful business and those remaining stagnant has triggered much more growth in high-end office construction of class-A+ and class-A buildings. Similarly, the multifamily sector is driving up their development of high-end or luxury properties for a few reasons. The growing restrictions on lending lead banks to focus on loans that provide the best returns, which have proven to be luxury properties with high rents. The banks’ loaning preferences coupled with increasing costs for construction are forcing developers to target high-end multifamily projects. Additionally, about 103,000 hotel rooms are under construction in the U.S., driving the growth of the lodging sector. Overall, experts predict the success in 2016 will lead 2017 to serve as a transition to lower rates of new construction through 2020.
Written by Front Street Intern Oliver Tranter.