by Brianna Crandall — August 28, 2015—The Millennial generation is having a profound impact on the built environment under construction in 2015, according to a new report from global commercial real estate services firm JLL (Jones Lang LaSalle) tracking national construction trends. Throughout 2015, tenant improvement (TI) — or the renovation of existing space — has been a bright spot in the construction industry, even as labor and construction costs continue to rise.
There has been a 14.2% rise in TI projects since the second quarter of 2013, as landlords compete to attract tenants and companies compete for Millennial talent. This is especially prevalent in office markets that are saturated with new construction and renovation.
According to JLL’s latest report on U.S. non-residential construction activity, United States Construction Perspective – Q2 2015, tenant improvement costs are declining in most key markets, as landlords eager to compete for tenants are more willing to pay for them. For office building owners, the average TI package nationwide is approximately $30-$50 per-square-foot in Central Business Districts (CBDs). These packages have become especially important as tenants look to customize office space to attract and retain employees—especially Millennials.
“Millennials are shaping how and where we work—and also how and where we shop, and even the path our packages take from ship to doorstep,” said Todd Burns, president, JLL Project and Development Services, the Americas. “By 2020, the U.S. workforce will be comprised of 50% Millennials, more than all other generations combined. Individually, they may not realize that they’re influencing national construction trends to favor tenant improvement over new construction, but the numbers show it’s no coincidence.”
Companies are focused on accommodating their Millennial employees and their preference for offices in existing urban locations that are close to amenities and often with unique, open interior spaces. As a result, as companies begin to renovate and occupy older buildings, office space vacancies are slowly declining and are down 10.2% since Q2 2011.
“Construction costs remain high, and the amount of available stock is increasing rapidly, so many tenants are focused on renovating rather than building new,” said Dana Westgren, JLL industry research analyst. “Economics, however, are not the whole story. Millennials want everything nearby. Same-day delivery trends favor renovating urban warehouses, while the same cultural preferences favor trendy offices in renovated urban lofts. It’s all interrelated.”
The JLL research also points to other key construction industry trends playing out in 2015, including:
Rethinking the retail environment: New “omnichannel” strategies emphasize convenience for customers by leveraging their brick-and-mortar stores as e-commerce pick-up/return depots, which in turn requires a revamped store configuration. On the construction front, the majority of new retail space is located in the Northeast and Florida, with some Midwestern growth. In particular, Florida’s growth is driven by increased consumer confidence, growth in tourism and a recovering housing market.
Manufacturing industry driving construction volume: While construction in the education sector has been strong as universities focus on building new space to keep students engaged on campus, it has been upstaged by a surprising category: manufacturing. Annual project spend on construction within the manufacturing sector has increased from $57.8 billion in 2014 to $90.3 billion year-to-date (YTD) in 2015. For example, Sparrows Point in Baltimore, the largest privately owned industrial re-development in the USA, has redevelopment plans to become a world-class transportation, manufacturing and logistics hub.
Technology leads the charge: Technology companies are driving demand for “cool,” renovated office space. At the same time, industrial occupiers want and need more custom e-commerce space, with higher shelving, specialized lighting, new technology and office space. Similarly, in retail, quick-service restaurant chains are investing in new, creative interior build-outs to better compete with fast-casual concepts. This increase in TI packages gives occupiers the opportunity for more customization and controls costs by focusing on renovation over new construction.
Future opportunity and capital planning: With construction starts at their highest point since the recession, the industry is still in the early stages of its recovery and will continue to grow in response to overall economic growth. Activity is still far below pre-recession highs, indicating growth will continue over the next several years, and dollar value of tenant improvement allowances will, too.
“We expect to see continued growth of tenant improvements,” said Burns. “Companies will continue to grab vacant property both in primary and secondary markets and build out offices to fit shifting trends. That activity will place a premium on strategic capital planning.”
JLL research revealed that on average, Forbes 1000 companies miss their capital plan targets for office real estate along by an estimated $12.2 billion annually. Of that total, 28% was overspent.
“As capital continues to be scrutinized, it becomes even more important for companies to align the available capital with the firm’s overall strategy and objectives,” said Jim Dobleske, JLL Project and Development Services Global Board chair. “Some of the worst performers overspend by as much as 20%, and that eats into these companies’ opportunities for growth. As space changes to meet the needs, wants and demands of the Millennial workforce, smart capital planning and construction management can make the difference between success and failure.”
JLL’s Project and Development Services division develops, designs and constructs commercial real estate projects for globally prominent corporations, educational institutions, public jurisdictions, health-care organizations, retailers, banks, hotels and real estate owners. JLL’s PDS team is comprised of 3,200 project managers across 49 countries worldwide.
