How Business is Affecting Commercial Construction

For much of the business sector, work and travel go hand-in-hand—and the recent trends in construction activity have supported that assertion.

Dodge Data & Analytics recently released its 2016 Dodge Construction Outlook and held its executive conference in Washington, D.C., where chief economist Robert Murray gave a presentation of the state of the construction upturn to members of the industry.

Robert Murray, chief economist at Dodge Data & Analytics, presents the 2016 construction outlook in Washington, D.C. (photo: Dodge Data & Analytics)

According to Dodge, the hotel and office sectors continue to ride the wave as the economy flips the page from 2015 to 2016, helping drive the commercial sector forward.

Hotel construction saw a sharp climb from 2011-2014, with strong growth still taking place this year. By the end of the year, the sector will show an 18-percent increase in square footage and a 22-percent jump in dollar value of starts.

Murray said that the hotel construction market has been impacted by an increase in business travel as industry financials have strengthened. That has also impacted convention center construction and their associated hotels.

As a result of the passage of legislation legalizing gambling in multiple states, casino building has also been more active.

Dodge projects that in 2016, “increases in consumer spending and continued improvement in employment will support additional business and leisure travel, sustaining the upward momentum for new hotel construction.”

However, the sector “may be nearing its peak” and will modestly grow 4 percent next year to 71 million square feet, with a 6-percent gain in dollar value to $14.7 billion.

Meanwhile, an improving business environment has also affected the office sector. While office construction eased back in 2015, it’s expected to re-gain momentum in 2016.

Murray said office vacancies peaked in 2010 but have been retreating since. According to CBRE Group’s third quarter report, the sector’s downtown office vacancy rate was at 10.4 percent, and the suburban office vacancy rate was at 15 percent.

Much of the recent activity has included data centers, government office buildings and corporate buildings. “Corporate earnings have been strong, leading to the start of more corporate headquarters,” said Murray.

Elsewhere in the commercial sector, things have been moving a little slower. Store construction showed moderate growth in 2011-2013 but has stalled over the last two years.

Store construction tends to follow single-family housing, but one concern is how online sales will affect the sector as things improve. Additionally, several large retailers continue to close stores, including Radio Shack, Office Depot/Office Max, Family Dollar, Staples and Barnes & Noble. Wal-Mart construction starts are also down of late.

There are some positives, however.

Murray says large mixed-use projects are providing support to retail construction, and store renovations have held up much better than new construction.

“In 2016, the strengthening economy, improving housing market, and increasing number of large projects should encourage an expansion in retail starts,” the Dodge Outlook report reads. Construction is expected to grow 9 percent in square footage as the dollar value of starts gains 10 percent.

Finally, vacancy rates are easing in the warehouse sector. Murray says they reached 14.5 percent in the second quarter of 2010 but have since retreated to 9.6 percent in the third quarter of 2015.

He notes that larger regional facilities are being built by major retailers.

Looking ahead, he says, exports “are likely to be dampened in the near term, due to global economic slowdown and strong U.S. dollar.” He adds that there is a “continued need for updated facilities to handle improved inventory management practices.”