By Kate Snyder
Across the West Coast, experts are generally optimistic about the construction industry’s impact on commercial real estate despite some of the recent effects of rising inflation, supply chain disruptions, the ongoing COVID-19 pandemic and a protracted land war in Europe.
Earlier this year, JLL – a commercial real estate services firm with its Americas branch headquartered in Chicago – released a national construction report detailing the state of the industry in the first half of 2022, with a focus on costs, materials and labor.
According to Andrew Volz, JLL construction research lead, there has been a significant increase in activity across the nation with backlogs stabilizing and certain sectors, like manufacturing, in high demand. However, he also noted that what is in demand will likely continue to shift sector by sector.
“Where that money is flowing to by project type will change quite a bit,” he said.
He also acknowledged “known unknowns,” such as the effects that the war in Ukraine or the lockdowns in China might have on the market as a whole. Although he expects continued growth overall.
“We are navigating those things, but generally [we have] a positive outlook,” Volz said.
Construction unemployment dropped 1.8 percent compared to pre-pandemic numbers, according to the report, and wages are up 10.5 percent. Compared to pre-pandemic numbers, material costs are also up 42.5 percent and total costs are up 23.9 percent.
In the report, data also shows that price volatility is a continued challenge in construction materials, although some stability has been recorded. Steel and lumber, which saw the most aggressive price increases in 2021, are stabilizing. However, fuels, plastics, and even services related to construction are responsible for price increases in the first half of 2022 and are unlikely to stabilize over the second half of the year.
In Seattle, week over week and month over month, costs have continued to rise, said Carmen Van Liere, JLL Project & Development Services vice president and Seattle/Bellevue lead. Some of that, she said, is driven by labor availability and demand in the market.
“We’re still seeing the market being bullish in Seattle,” she said. “It’s as hot as it’s ever been… Every general contractor in our market is incredibly busy. It’s hard for us to get good coverage on projects because people simply cannot take on any more work.”
Van Liere said some offices are consolidating into smaller footprints – 150,000 square feet to 50,000 square feet, for example – and some major developments have been put on hold. However, she also said there are many projects underway, such as the Microsoft Campus Expansion, and in the pipeline, such as with Seattle University and the University of Washington, among others.
“Life science is obviously very hot in Seattle as well,” Van Liere said. “So, cautiously optimistic for the future and certainly seeing a ton of demand.”
The focus in the Bay Area and greater Northern California is on reimagining office spaces, said Jessica Bourdet, JLL Project & Development Services managing director and Northern California lead. Especially prevalent are companies in the electro-automotive industry, but San Francisco as a whole is looking to redefine what commercial office space is through shoring up spaces – similar to what’s happening in the Seattle market.
“We are still very impacted in terms of construction availability with both labor and materials,” she said. “We are definitely still impacted by lower availability of labor … we’re seeing prices continue to skyrocket.”
Very similarly to the northern markets, Southern California is seeing the same lack of decision-making from clients and rising prices in labor. In Los Angeles, specialty space is still a hot sector of the market, such as for studio and technical space development, said Sarah Friedman, JLL Project & Development Services senior vice president in Los Angeles.
However, activity in Orange County is beginning to wane, said Marty Potts, JLL Project & Development Services senior vice president and Orange County, California lead. The slowdown is due to a variety of factors, including rising inflation, rising interest rates and clients being slow to make decisions.
“There is no doubt there are signs of trouble on the horizon,” Potts said. “What we’ve been experiencing over the last 12 to 18 months is noticeably slowing down.”
According to Potts,the multifamily market is still extremely robust. Other sectors, including life science and health care, also remain strong.
“I’m very optimistic about Orange County,” he said.
Down in San Diego, Kirt Gilliland, JLL Project & Development Services senior vice president and San Diego lead, said there’s also a bit of a slowdown with more developers pressing pause on projects that haven’t broken ground yet.
“I think in general anything that’s underway or under construction, developers and owners are moving forward with,” Gilliland said. “Anything where they haven’t started construction, we’re starting to see more and more of our clients hit the pause button to see what’s going to happen in the next 60, 90 or 120 days.”