Commercial Construction on the Rise

According to Branch, the trend toward urban as opposed to suburban living has had an effect on commercial construction, noting that retail construction is lagging because, over the last 10 years, it was tied to single family construction. “With less demand for homes, that means less need for malls,” he said.

“Less suburban growth means the number of square feet for new retail projects is much smaller. There is a greater proportion of mixed-use projects composed of offices/hotels/multi-family buildings in the cities, but inside of them is a semblance of retail construction. The footprint is smaller, so the value is smaller. The next several years will be a challenging environment for retail construction,” he predicted.

“On the other hand,” Branch continued, “Retail renovation is gaining ground. Back in 2007, retail builds were new, but now, they are doing more renovations. More than 40% of this activity in 2014 was renovation and will continue in 2015, 2016. And the retail sector has also been affected by online sales.

“We can see it now from outlets like Home Depot and Lowes. They are investing in their online presence at the expense of brick and mortar stores. All that online shopping has been a boon for warehouse construction.” Branch pointed to the huge uptick in warehouse construction on the east coast, partly because of a bigger, wider, deeper Panama Canal. “Vacancy rates in warehouses are low across the board,” he said.

Hotels and Convention Centers

Branch had good news for those involved in the hospitality industry. “Travel is improving,” he said. “As we look at the next 18 months of growing leisure and business travel, there will continue to be a bigger construction trend on hotels, and many of them are in the upgrading cycle. There are a lot of high-end properties, casinos and convention center hotels.”

Office Buildings

Three big trends are impacting this sector:

Data Centers: As more companies are pushing data into the cloud, there is a need for more office space to hold the servers and people that manage the cloud storage.
Flagship corporate headquarters like Toyota’s corporate campus being built in Plano, TX.
Government centers including the 2.1 million square foot facility for the new FBI headquarters.

“We’re starting to see more speculative construction,” said Branch. “That is good news for the office construction market in addition to the fact there were 500,000 new office jobs last year, and next year we expect 750,000 more. That helps fill that space built on speculation.”

Institutional

“There are stirrings of improving public finances, which are enhancing the outlook,” said Branch. “Growth is expected in 2015 and 2016, but from our perspective, that is all in the education side. College and university construction has grown as gains in the stock market have fueled endowment growth. Most of that building has been in amenity construction. There is also growth in the kindergarten through Grade 12 market. It was 3.5 times the size of the post-secondary market.”

Enrollment growth ultimately drives activity for many segments in education building starts. In the U.S., the enrollment increase is skewed toward the south and west segments of the country. However, according to Branch, many of the K through 12 schools in the east are old and in poor condition, so even though there is not much population growth in those states, they do need to fix up old properties.

Healthcare building is mostly on hold, according to Branch. “The population is aging, but construction activity has been flat mostly because of uncertainty in the health care sector. There aren’t as many big projects, and there is a great deal of uncertainty around Obamacare. Decisions are being postponed until after the election.”

There are more urgent care facilities and clinics, but that is not usually new construction. “Because of high vacancy rates in the retail market, clinics are locating in strip malls and shopping malls,” said Branch.

Summary

In the first six months of 2015, the number of commercial projects in bidding were flat or down, but there were more projects entering the planning phase in that time period. “As they go into bidding,” said Branch, “This is the big opportunity for valve manufacturers to be aggressive in marketing to the non-residential, office/warehouse/hotel sales and marketing sectors.” Branch anticipates that valve shipments to commercial and institutional construction will see double-digit growth for 2015 and 2016.

Total Construction is expected to be up 14% in 2015, generally in the office, warehouse and hotel sectors, but the growth rate will slip a bit in 2016 due mostly to the cancellation of LNG export facilities that were planned.

Kate Kunkel is senior editor of VALVE Magazine. Reach her at kkunkel@vma.org.