Despite ongoing pandemic-related turbulence , construction starts and development paint a hopeful picture for commercial real estate ’ s near future .
As the economy continues to emerge from the effects of the COVID-19 pandemic , commercial real estate construction , buoyed by the continued loosening of pandemic restrictions , has been on the rise as well . Through 1H2021 , Dodge Data & Analytics reported a 10 percent rise in total U . S . commercial and multifamily building starts , up to $ 108.5 billion , compared to the same period in 2020 . But many of the issues that slowed construction in 2020 remain a concern , even as the economy continues to improve .
At the onset of the pandemic in March 2020 , labor that was considered essential was allowed to proceed , but the definition of “ essential ” varied widely across the country , and construction was halted in many areas . According to JLL ’ s 1H Construction Outlook Report , 26 percent of ongoing construction work was in a jurisdiction where work was shut down , including seven states where the average shutdown lasted 41 days . The effect was dramatic — 1.3 million construction jobs were lost from February through April 2020 , a contraction of more than 17 percent , according to the report .
However , as shutdown orders were lifted in May 2020 , the report says , the construction industry “ shifted from immediate crisis management to developing medium-term solutions for working through a pandemic that was a known and persistent challenge for the year ahead .”
Among the primary challenges are the increasing costs of materials and a dearth of skilled construction labor . As a result , according to JLL , 2020 nonresidential building construction starts were down 24 percent from the previous year .
As the economy reopened , new construction challenges popped up as well , primarily the implementation of new COVIDrelated safety protocols and a learning ( and spending ) curve for newly introduced construction technology . Certain sectors — primarily warehouse and industrial — encountered increased demand , while others , such as retail and hospitality , slowed down .
MATERIAL CONCERNS In the early days of the pandemic , construction projects were hamstrung by a shortage of materials . During the pandemic — from 2Q2020 through 2Q2021 — “ the story was really one of disruption , of supply chain challenges , of shortages in production and shipping ,” says Henry D ’ Esposito , construction research lead for JLL and author of the JLL report . “ All the way through the supply chain , from early production of raw materials through production through distribution , there were delays and cost increases all along that chain .”
As a result , prices increased . For some commodities , he says — particularly lumber and steel — prices went up two or three times from where they ’ d been . In the 12 months leading up to April 2021 , for example , lumber prices rose 86 percent and steel jumped 67 percent . By this summer , prices had come back down somewhat , but D ’ Esposito adds , “ we ’ re forecasting a more broad-based widespread inflation going forward rather than a one-off issue . Last year , lumber went up , but
As the economy reopened , new construction challenges popped up as well , primarily the implementation of new COVID-related safety protocols and a learning ( and spending ) curve for newly introduced construction technology .
concrete , drywall , and other commodities were flatter . What we ’ re expecting now is we ’ ll see mid- to upper-single-digit increases across the board .”
LABOR SHORTAGES AND COMPETITION “ I think labor is going to be the bigger issue going forward ,” says D ’ Esposito , despite material costs dominating much of the discourse recently . Even before the pandemic , many markets had shortages of skilled construction labor . As building activity resumed , commercial construction faced increased competition for labor on several fronts .
On one front is the boom in residential construction . The National Association of Home Builders reported that residential construction employment increased by 15,200 in June , while nonresidential construction lost
22,600 jobs that month and 21,700 jobs in May . By July 2021 , notes NAHB , residential construction employment exceeded its February 2020 level , while only 55 percent of nonresidential construction jobs lost in March and April 2020 had been recovered .
Construction could also encounter competition from other industries that have increased wages , where there ’ s an overlap in the labor pool , adds D ’ Esposito . And as government infrastructure efforts ramp up , they will also impact both labor and materials costs , he says . While infrastructure work is “ obviously different from a typical commercial construction project , at the end of the day , an infrastructure project will use the same concrete , the same steel , and many of the same workforce that would go into a commercial project .”
One longer-term trend from the pandemic is an increased use of construction tech adoption , as builders had to shift to remote environments . “ We thought that would stick around and serve as a springboard to faster growth across the industry ,” says D ’ Esposito , “ and that is so far what we ’ ve seen .” While the technologies took time and money to roll out , “ once you do that work , they ’ ve proven very effective .”
SECTORS TO WATCH Construction did , however , continue at a rapid pace for some commercial sectors . The increase in e-commerce has spurred warehouse construction , and Jeff Engelstad , CCIM , points to strong activity in logistics as well . Engelstad , professor of the practice at Franklin L . Burns School of Real Estate and Construction Management at the University of Denver , says that the pandemic-related disruptions in supply chains “ tell us that we need better solutions to supply chain management — and a lot of that has been last-mile logistics .”
Engelstad also notes increase activity in multifamily . “ Pandemic or no pandemic , people still need a place to live ,” he says , “ and even with the eviction moratorium lifting , it really hasn ’ t hurt the investment value of apartment buildings at all .”
A midyear report from Marcus & Millichap noted that more than 175,000 apartments were completed in 1H2021 , which raised the annual total to about 363,000 units — the largest completion volume over four quarters in at least 20 years . Top multifamily markets included Dallas-Fort Worth , with more than 27,000 completions , and Houston with 20,200 .
Previous spread , photo by Wang An Qi
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE FALL 2021