Global economic shifts are causing

decision makers to think more

strategically about developmentUnited States

Construction Perspective

Q1 2016

Economic struggles from far away affect our own built environments more

as the world becomes more interconnected.

Although the United States had success in recovering after the financial crisis, several economic headwinds are

dampening the global recovery. These issues include:

• A reduction in investment, driven in part by low interest rates and the threat of deflation

• Political and economic uncertainty and unrest in various regions, including the refugee crisis and political change

• Stagnant productivity and employment growth

• Low commodity prices, especially in powerhouses like China and in oil producing countries

In a global import and export economy, those issues listed above will affect business demand, and in turn construction

demand, in the United States. Many large multinational corporations are having to consider future income streams

when deciding where to invest in capital expenditures. Consumers are dialing back spending, forcing retailers to come

up with new and exciting ways to attract and retain loyal customers. The upcoming presidential election has businesses

wary, as they weigh the pros and cons of each candidate.

Despite these concerns, the United States construction industry saw a strong first quarter, with projections of steady,

albeit lower level, growth in Q2. Even though developers and occupiers are proceeding with caution, they continue to

build. And as we keep monitoring the global economy, it is important to remember the construction industry lags the

broader economy one to two years, giving vigilant experts ample opportunity to asses portfolio strategy in advance of

any economic stagnation.

Global economics: Growth is plateauing

Global interest rates in key economies remain low, as countries are

not bullish on future growth

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Reserve Bankof Australia

FederalReserve

Swiss NationalBank

EuropeanCentral Bank

Bank of Japan Reserve Bankof New Zealand

Bank of Canada Bank ofEngland

Interest rates: Major central banks Rate cuts stimulate a

struggling economy, while high

interest rates show that a

government is confident about

future growth, or that inflation

is growing.

Average:

0.6 percent

Source: JLL Research, OECD

GDP growth is projected to grow slightly through 2017, though key

regions will have steep declines

5

GD

P, P

PP

exc

hang

e ra

te, b

asis

poi

nts

Source: JLL Research, OECD Most recent available data at time of publication

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2015 2016 2017 GDP declines are partially due to the steep drop in oil

prices, the steel glut, and global debt.

China’s deceleration has some of the biggest ripples worldwide

6

The manufacturing behemoth's rapid GDP decline will affect demand for global construction

commodities

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010 2011 2012 2013 2014 2015

GD

P, P

PP

exc

hang

e ra

te, b

asis

poi

nts

Global employment declined 77.2 percent since the crisis

7

An employment slump sends ripples through the broader economy, as demand for import goods and

ability to manufacture export goods decline

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Q4

2015

une

mpl

oym

ent r

ates

, OE

CD

cou

ntrie

s

Source: JLL Research, OECD Most recent available data at time of publication

Domestic economics: Still growing, though cautiously

Domestic GDP grew more slowly QoQ in Q4, due in part to

downturns in nonresidential investment and a decrease in imports

9

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Con

trib

utio

ns to

per

cent

cha

nge

in r

eal G

DP

(S

AA

R)

GDP growth declined YoY in Q4

2015, from growth of 2.0 percent to

1.4 percent growth. Though the rate

is continuing to slow, the U.S. has

seen the strongest recovery

worldwide since the recession.

Source: JLL Research, Bureau of Economic Analysis Most recent available data at time of publication

GDP per capita continues to grow at a steady rate domestically,

despite global concerns

10

Source: JLL Research, World Bank Most recent available data at time of publication

$42,000

$44,000

$46,000

$48,000

$50,000

$52,000

$54,000

$56,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

GD

P p

er c

apita

11

Con

stru

ctio

n em

ploy

men

t (n

umbe

r of

em

ploy

ees,

in th

ousa

nds) O

verall employm

ent (number of em

ployees, in thousands)Domestic construction employment grew 4.7 percent YoY, despite a

slump in early 2016

Source: JLL Research, Bureau of Labor Statistics Most recent available data at time of publication

120,000

125,000

130,000

135,000

140,000

145,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014 2015 2016

Construction Overall Employment

Productivity is increasing since 2009 lows, as laborers put in

increasingly more hours

12

Source: JLL Research, Bureau of Labor Statistics Most recent available data at time of publication

Construction workers are working more hours,

with higher wages, driving up overall construction

costs.

Per

cent

cha

nge

in h

ours

wor

ked:

Non

resi

dent

ial c

onst

ruct

ion

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Q4 Construction Backlog Indicator (CBI) declined in the West and

Northeast, while the South’s CBI grew 8.7 percent MoM

13

Infrastructure CBI grew 23.2 percent MoM, as big projects ramp up countrywide

7.1

months

11.2

months

8.4 months6.5

months

National average

construction backlog

8.4monthsThe CBI indicates the number of work that will

be performed by commercial/industrial

contractors in the next few months, based on

projects in the pipeline currently.

Source: JLL Research, Associated Builders and Contractors Most recent available data at time of publication

Cost trends: Building costs growing at a faster rate

Building costs grew 3.5 percent between 2014 and 2015 - and they

continue to grow

0

1000

2000

3000

4000

5000

6000

7000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Building cost index

BC

I: 20

-city

labo

r an

d m

ater

ials

cos

t ave

rage

inde

x

Overall costs are conservatively

projected to grow at an average of

1.5 percent annually through 2020.

Source: JLL Research, ENR

Materials Index: w

eighted price movem

ent of structural steel, portlandcem

ent

and 2 X 4 lum

ber

16

Com

mon

labo

r in

dex:

Uni

on w

age

plus

frin

ge b

enef

its

Materials prices are projected to grow slightly and flatten through

2020, and labor costs will continue to grow

Source: JLL Research, ENR

0

500

1000

1500

2000

2500

3000

3500

4000

0

5000

10000

15000

20000

25000

30000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Common Labor Index Materials Index

Global trade flows of commodities are declining as well; total

volumes of imports and exports projected to grow by only 2.6

percent in 2015.

17

Wages continue to grow, though the rate of growth dropped at the

end of 2015

Source: JLL Research, Bureau of Labor Statistics

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Priv

ate

indu

stry

wag

es a

nd s

alar

ies

for

cons

truc

tion

indu

strie

s

18

Non

resi

dent

ial p

ut in

pla

ce (

$M)

Nonresidential put-in-place value is up 10.1 percent YoY, though it

saw a decline of 1.4 percent MoM in February

Source: JLL Research, U.S. Census Most recent available data at time of publication

$580.0

$600.0

$620.0

$640.0

$660.0

$680.0

$700.0

$720.0

Feb. 2015 Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016

Coastal cities remain the most expensive to build, in part due to high

demand and dwindling available space

19

0

20

40

60

80

100

120

140

2016

RS

Mea

ns n

atio

nal c

ost i

ndex

Source: JLL Research, RS Means

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

20

Three of the five most expensive markets are in the Bay Area, as

San Francisco rents come close to eclipsing New York

Source: JLL Research

Dire

ct a

vera

ge a

skin

g re

nt (

$p.s

.f.)

Some of the highest cost construction markets, including

Chicago and Philadelphia, do not have the highest rents.

It is cheaper for these markets to renovate existing

space than to try and attract occupiers from high cost

markets.

0

5000

10000

15000

20000

25000

New York Boston SanFrancisco

Chicago Washington,DC

Los Angeles Seattle Portland Denver Phoenix

Q2 2015 Q4 2015

21

Cost of construction in major markets (Q4 2015)RLB Comparative Cost Index

tracks the bid cost of

construction, including labor,

materials, contractor and

overhead costs.

RLB

com

para

tive

cost

inde

xHigh cost construction markets all saw approximately 1.0 percent

growth between Q2 and Q4 2015

Source: JLL Research, RLB Most recent available data at time of publication

22

Construction put in place sector Feb. 2015 Feb. 2016

Highway and Street $80.3M $99.9M

Educational $79.2M $85.9M

Manufacturing $77.3M $77.9M

Commercial $64.1M $71.1M

Office $49.8M $62.4M

Healthcare $38.9M $40.2M

Infrastructure projects demand the majority of nonresidential

construction spend, with an increase of 24.4 percent YoY

Source: JLL Research, U.S. Census Most recent available data at time of publication

Construction put-in-place: Activity is starting to flatten

The impacts of global uncertainty include lowering capital

expenditures

Companies are focusing on lean budgeting in the face of low economic confidence

24

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2010 2011 2012 2013 2014 2015 2016

Future capital expenditures

NY

C d

iffus

ion

inde

x

Source: JLL Research, FRED

25

22.5 m.s.f. 20.3 m.s.f. 13.6 m.s.f.

Q1 2013

12.5 m.s.f.

Q1 2014 Q1 2015 Q1 2016

Office starts declined 33.0 percent YoY in Q1 2016, as activity

begins to flatten

Source: JLL Research, Costar Group

26

Industrial construction

Retail construction

157.7m.s.f. under

construction

Q1 2016

Q1 2015

Q1 2016

178.0m.s.f. under

construction

57.2m.s.f. under

construction

70.2m.s.f. under

construction

Q1 2015

Q1 2016

Office construction

Q1 2015

96.8m.s.f under

construction80.5

m.s.f under

construction

Retail construction grew 24.4 percent YoY due to an increase in

retail renovation used to attract new consumers

Source: JLL Research, CoStar Group Most recent available data at time of publication

27

Office completions remained at the same level as Q1 2015, after Q4

2015 reached a five-year high

Source: JLL Research

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

Q12010

Q22010

Q32010

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

YT

D c

ompl

etio

ns (

s.f.)

28

8.3m.s.f.Dallas

3.4m.s.f.Seattle

4.7m.s.f.San

Francisco 3.3m.s.f.Silicon Valley

5.7m.s.f.

Houston

4.3m.s.f.

Chicago

3.2m.s.f.

Nashville

14.3m.s.f.

New York City

6.4m.s.f.

Washington DC

3.6m.s.f.

Philadelphia

Q1 2016 under construction

Nashville became one of the top ten most active office construction

markets, while Houston slipped from the most active in 2015 to fourth

Source: JLL Research

Nashville, Salt Lake and San Francisco have the lowest vacancy

rates nationwide, making them ripe for new construction.

29

The highest vacancy rates were

in the Northeast, in New Jersey,

Fairfield County and

Westchester County.

Source: JLL Research

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Nashville

Salt Lake City

San Francisco

Portland

Seattle-Bellevue

New York

Oakland-East Bay

Austin

Charlotte

Orange County

Tota

l vac

ancy

(%

)

30

Industrial deliveries grew YoY in 2016, reflecting overall growth in

the domestic industrial sector

Source: JLL Research

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

YT

D c

ompl

etio

ns (

s.f.)

16.0m.s.f.Inland Empire

7.7m.s.f.Reno

31

24.4m.s.f.Dallas 4.2

m.s.f.Tampa

Bay

4.3m.s.f.

Oakland

10.2m.s.f.

Houston

16.9m.s.f.

Chicago

5.1m.s.f.

Kansas City

15.3m.s.f.Atlanta

13.3m.s.f.

Philadelphia

Tampa Bay saw a spike in activity in Q1, eclipsing Los Angeles in

the top 10 industrial construction markets

Source: JLL Research

Q1 2016 under construction

32

Retail deliveries are down 16.8 percent YoY, though current activity

saw a spike

Source: JLL Research, CoStar

Ret

ail c

ompl

etio

ns (

s.f.)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

33

3.8m.s.f.

Houston

1.9m.s.f.Los

Angeles

4.0m.s.f.Dallas

2.6m.s.f.

Chicago

2.3m.s.f.

Washington, DC

3.1m.s.f.

Northern NJ

2.4m.s.f.Long Island

2.6m.s.f.New

York City

2.1m.s.f.Boston

2.3m.s.f.Miami

Dallas had the most retail activity in Q1, up 73.9 percent QoQ;

activity on the coasts remained flat

Source: JLL Research

Q1 2016 under construction

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2008 2009 2010 2011 2012 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

34

Per

cent

vac

ant

-0.1 percentQoQ

Retail vacancies continued to decline, though at a slower rate

Source: JLL Research, CoStar

What’s next for U.S. construction?

Key construction markets

36

Source: JLL Research

Nashville has seen rapid construction growth, as employers take advantage of its low-cost, well-

educated workforce. This follows the broader trend in the Southeast, as office, industrial and retail

have all seen an uptick in activity in the last year.

San Francisco is catching up to New York in terms of cost to build, driven by demand and high labor

costs. It is possible San Francisco could become the most expensive market in 2016, though all major

coastal cities will continue to see cost growth.

The decline in energy prices has begun to hit Houston, which saw a decline of 120.1 percent in

office construction activity YoY. The market has seen a growth in subletting opportunities and has

low-cost labor, which could be attractive to occupiers wanting to avoid high-cost markets.

Dallas saw a hike in retail construction, as retailers followed population flows to Texas. It was one of

the lone markets that experienced retail development growth.

What’s next for construction?

Uncertainty will breed more caution: The 2016 election is ramping up and will affect consumer behavior as domestic

residents weigh who they think will become the next leader. Businesses are likely to proceed with caution when it

comes to construction investment as they prepare for future regulations or economic shifts coming from the new

president.

The Fed increased interest rates, indicating faith in the domestic economy; however, the global economy has

slowed, and contractors are uncertain how this may affect the markets. Most noticeably, many inputs, such as low-cost

steel, are manufactured in bulk in China. As its manufacturing sector continues to decline, materials prices will continue

to drop into 2016.

Wages will remain the key cost driver for construction, as materials prices remain relatively low in the short term.

There remains a dearth of trained construction employees, especially in trade positions, and wages are rising as a

result.

Construction follows the global economy but lags it by 1-2 years. General economic growth nationwide has

slowed, and the construction industry will be no different. However, demand from downstream markets will stay strong

and construction profit margins will continue to grow, keeping construction growing at a faster rate than the overall

economy. The effects of the global plateau won’t fully affect the construction industry until at least 2017.

© 2016 Jones Lang LaSalle IP, Inc.

All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Thank you

Dana Westgren

Research Analyst

Project and Development Services

+1 (202) 719 5003

Dana.Westgren@am.jll.com