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MARKET ANALYSIS: Outlook for Non-Residential Construction

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Construction of office space collapsed after 2007 and the completion of new space remains way below the historic average. For instance, Suburban office completion rates were 15 million square feet in 2007 and are currently only five million square feet per year. This has led to a decline in vacancy rates, helping to boost rents, especially in some of the strongest markets, such as Miami, San Francisco and Chicago. With rental rates rising (3.3% last year)
and vacancy rates falling, the financial returns have improved and are very attractive for both purchasing buildings and undertaking new projects in the hot regional markets.

Given the economic and employment forecast, demand is expected to continue to outstrip supply through 2016. Rising rents plus falling vacancy rates will continue to bolster the expected financial return through next year. As a result, this segment will continue to attract investments and grow rapidly through 2017.

The Industrial/Manufacturing segment is really hot and booming—up 35% in 2015 over the first quarter of 2014.
The demand for industrial space is nearly double the level of current completion rates. Falling vacancy rates have helped owners boost rental rates significantly—up 4.8% on average in 2014. The vacancy rate in this segment has dropped from 14% at the cyclical low point to near 10% in early 2015—about where it was in 2008. The forecast for industrial production and shipping rates will keep the fundamentals strong through 2016. Industry experts expect demand growth to continue to exceed the completion rate, despite the recent surge in construction through 2016. Rents are expected to continue to move up 4-5% through 2017, driving expected financial returns even higher. Right now this segment has the highest return for commercial investors.

Commercial segment strong, with bright outlook for strip malls.
Commercial, which includes a range of retail projects, has also been seeing strong growth. Due to the sharp drop in
retail construction projects after the great recession, completion rates are now lagging improving retail sales. Commercial real estate investors are expecting much higher rents (up 5-6%) in retail strip mall space for 2015-17. The boost in expected returns has led to a surge in the transactions of mall assets—up 37% in the fourth quarter of 2014 over the previous year. Investment returns and transactions in existing mall space will eventually lead to new construction projects in 2016-17. Again, expectations of double digit growth rates are reasonable.

Summary Private investment: Very healthy growth over the next two years.
The three segments with strong growth prospects will be offset by modest growth in the remainder of the private sector. Commercial, Industrial and Office will be looking at very strong double-digit growth for several years. Overall private investment growth will however be in the 6-8% range because of modest growth in a few of the other big segments, such as Power and Health Care.

Public investment: Not much happening here.
Public non-residential structure investments are focused on four primary segments: Highway, Education, Transportation and Sewage/water. Those categories account for 90% of the public structures expenditures.

BOTTOM-LINE: As mentioned above, this is not an easy segment to give a simple forecast for the next few years. Although Private investment growth will be healthy, it appears that Public investment in structures will not grow that much. Public investment share will continue to decline. Overall growth for nonresidential construction expenditures will be in the 4-6% range.