Building Momentum

By Adrian Ponsen & Maeve Gallagher

Source: CoStar Group Inc.

Source: CoStar Group Inc.

Almost five years into the current economic expansion, construction is ramping up but in varying degrees across property types. The industrial sector has had a significant uptick in groundbreakings, with more than 121 million square feet under construction today, about 22 percent higher than one year ago and well ahead of office and retail. Office construction continues to increase slowly but gradually, while retail construction volume has barely budged in over four years.

Industrial is often one of the first property types to kick off construction during economic growth periods, as its shorter construction timeline allows developers to quickly respond to market conditions. In addition, strong demand for modern logistics space and a shortage of inventory are spurring more development projects, with the highest levels of construction in markets such as Dallas-Fort Worth and the Inland Empire. But even in the Inland Empire, industrial construction underway is just 3.4 percent of existing inventory, a fraction of the annual 7.6 percent built from 2005-07.

With office vacancies still above their long-term average nationally, construction is currently confined to the largest institutional markets, which have recently outperformed in terms of economic recovery and rent growth, including Houston, the San Francisco Bay Area and New York. Diverging from the trend in other property types, the retail pipeline is at its lowest level in three years. Weak household income growth and competition from online sales have both driven a slow recovery in retail property fundamentals, delaying the need for new retail construction in most U.S. markets.

—Adrian Ponsen & Maeve Gallagher are real estate economists at CoStar Group Inc.