The commercial building sector has been on a “roller coaster ride” over the past decade, according to Dodge Data & Analytics chief economist Robert Murray. Heading into 2017, that ride should continue its upward trajectory from the year before.

Murray presented the findings of Dodge’s 2017 Construction Outlook report last week at the firm’s annual economic conference.

“While the overall economy has been sluggish, most market fundamentals [such as occupancies and rents] continue to perform well,” the report reads.

Courtesy of Dodge Data & Analytics
Courtesy of Dodge Data & Analytics

In the first nine months of 2016, commercial building is up 10 percent from the same time last year.

According to Dodge, commercial building will increase 6 percent in dollar volume (to $105.1 billion) on top of the 12-percent gain estimated for 2016. Office and store construction is showing improvement, while the healthy hotel segment will begin to retreat after a strong year.

Commercial construction lost momentum in 2015, but bounced back in 2016 with a 1-percent increase in square footage and the double-digit gain in dollars. In 2017, the segment is projected to increase 4-percent in square footage (to 648 million) along with the jump in dollar volume.

Retail

Murray said retail construction has lagged far behind the rest of the commercial sector for a few reasons. For one, it’s closely tied to the housing market, which has seen sluggish growth. Other key factors are a lack of progress in household incomes and a shift in the retail industry to online shopping.

This has helped pave the way for a 14-percent decrease in retail starts in 2016, combined with a 5-percent retreat in dollar volume.

Still, Dodge predicts a growing economy, improving housing market and recovery in consumer spending will make for a 5-percent increase in retail construction square-footage (to 102 million) in 2017, as well as a 6-percent gain in dollar volume (to $19.6 billion).

“Large mixed-use developments have been supporting the overall total,” noted Murray, pointing to a pullback in large retailer construction that contributed to the negative trend in recent years.

One positive in the retail segment has been alteration work, which continues to trend up. Renovation construction is up 8 percent in 2015 and 10 percent in 2016.

Office

Office starts are expected to advance 9 percent in square feet and 18 percent in dollar value in 2016 after a decline in 2015—the result of a lack of large projects that didn’t reach groundbreaking.

“Much of the recent activity has been data centers, government office buildings and corporate buildings, including headquarters,” said Murray.

Murray said a central theme in office construction has been a focus on corporate headquarters “as companies seek to consolidate from widely-distributed to more centralized operations.”

Looking ahead, Dodge projects office starts to gain another 10 percent in 2017 (to 110 million square feet), with dollar value increasing 9 percent (to $37.8 billion).

According to Dodge, vacancies peaked in 2010, but retreated through 2015. Recently, downtown vacancies are edging up while suburban vacancies are retreating. Real estate service firm CB Richard Ellis (CBRE) reports the downtown office vacancy rate in the third quarter of 2016 was at 10.7 percent, with a mark of 14.3 for suburban offices.

Like the retail segment, offices have seen a spike in alterations over the last few years, with a 12-perecent increase in 2015 and a 20-percent jump in 2016.

Hotels

Hotel construction has shown major gains over the last six years, with a 281-percent spike in square footage from 2011-2015.

Starts for the first nine months of 2016 have increased 8 percent in square footage and 24 percent in dollar value. Dodge estimates hotel construction will grow 10 percent in square footage and 25 percent in value by the end of the year.

Murray said the positive trend has been a result of improved business travel and strengthening industry financials. Additionally, the passing of legislation that has legalized gambling across multiple states has activated the casino-building market, with major projects reaching groundbreaking in 2016.

According to CBRE, hotel occupancy rates have increased in each quarter from 2011 through 2015, though the large supply that has been added to the market has begun to undermine that trend.

“I think the hotel sector is at its peak, but is beginning to settle back,” said Murray.

Dodge projects square footage starts in this segment will slide 1 percent in 2017 (to 70 million), with dollar value increasing just 1 percent (to $17.1 billion).

Warehouses

While the warehouse sector doesn’t encompass a large amount of the glass industry’s volume, it is worth noting, since it’s a major segment of commercial building.

Warehouse starts increased by double-digit rates every year from 2011-2014, but slowed in 2015 and 2016. Starts, according to Dodge, will increase 2 percent in square footage in 2017, with a 4-percent bump in dollar volume.

Stay tuned to USGNN.com™ this week for continued coverage of Dodge’s 2017 economic forecast.