JLL: Retail driving construction growth

First, the good news: A strong retail sector is helping to drive 2016 U.S. construction activity, with retail construction projects up 24.4% year-over-year, from 57.2 million sq. ft. in first quarter 2015 to 70.2 sq. fr. in first quarter 2016.



That’s according to JLL’s latest report on non-residential U.S. construction activity. On the less positive side, the report noted there is a cloud of economic uncertainty, which has companies laser-focused on lean budgeting and smart spending decisions.



“Developers and occupiers are proceeding with caution, but they continue to build and renovate,” said Todd Burns, president, project and development services, JLL Americas.



He added that project sponsors are thinking more strategically about development versus renovation. “The best managed companies have learned to keep their capital spend within about 2% of the plan,” Burns said, “by starting with a realistic budget, leveraging data and analytical platforms, and putting the right skills together in a centralized project team.”



For now, however, the market for commercial construction remains strong, with a strong first quarter and steady growth projected for the second.



RETAIL: Retail vacancies continue to decline, and retail has surged ahead of other property types in construction activity. Much of the growth in the first quarter has come from renovations as retailers continue to evolve to meet consumers’ demands for a unified shopping experience across channels.



“Retailers must innovate quickly to capture the untapped needs and expectations of consumers, who expect the same brand experience whether shopping online or in the brick-and-mortar store,” said Aaron Spiess, co-founder of Big Red Rooster, JLL’s brand experience company.



Another incentive to renovate is the federal tax break providing “safe harbor” for some remodeling expenses, Speiss said. Retail stores and restaurants that are eligible can reduce 75% of qualifying expenses with the remaining 25% capitalized and depreciated over time.



In terms of key markets, JLL noted that Dallas was the most active retail market in the first quarter, with activity up nearly 80% year-over-year.



In addition, Nashville has seen rapid construction growth in the last year. And the San Francisco area is catching up to New York metro area in construction costs and is actually on track to exceed New York as the “most expensive” construction market in 2016.