Construction Activity vs. Workforce: Out of Balance

construction
The financial recession of 2008 – 2009 resulted in a 39% decrease in the city’s construction workforce between 2008 and 2011. Simultaneously, the office commercial real estate industry felt a slowdown in leasing activity and subsequently, a decrease in the number of interior office space construction projects. From 2008 to 2009, the number of permits issued in the city of Chicago for office space interior build-outs decreased 35%.

As the economy began to recover, the number of permits issued from 2009 to 2015 jumped 50%. As of 2015, the number of construction permits issued returned to pre-recession levels, yet the increase in the construction workforce has lagged the permit trend. Construction labor in Chicago is only at 74% of its pre-recession levels as of 2015.

Cushman & Wakefield believes the shortage in the construction workforce is a major contributor to the recent trend of increased office space construction costs. Since 2009, the total permit value has increased 65%, while the city’s construction workforce has decreased by 13%. Until demand for construction work decreases, or there is a substantial increase in the construction workforce, construction costs will remain high as compared to previous years.

What does this mean for a Tenant
Start Your Project Early
Because of the scarcity of field labor, the local labor pool will be supplemented with less experienced trades and out of town labor that will be less productive in delivering the project. Construction projects that previously had a duration of 75 – 90 days may now take 90 – 130 days to complete.

Budget Accordingly
As construction costs are rising and the typical standard build out costs are 10% – 15% higher than the previous 12 – 18 months, an experienced project management team will provide essential detailed budget expertise and value engineering options to ensure target financial goals are met.

Evaluate Your Workplace
With the right real estate team, a substantial reduction in rentable square footage can be achieved by implementing new workplace strategies that will reduce overall real estate costs.

Explore Existing Conditions
Alternative choices, such as spec suites (landlord pre-built office space) or an existing space with reusable construction and furniture may reduce project costs and minimize potential schedule risk.

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Chicago Office Space Construction Permit Analysis

Since January 1, 2008 until April 30, 2015 the City of Chicago issued 4,723 renovation / alteration building permits for downtown Class A & B office buildings. These permits total $2.56 billion dollars spent on hard construction costs in these office buildings. The data was vetted to only include tenant construction for office space in downtown office buildings. The data does not include base building work completed by the owner or any retail spaces.

The chart below outlines the number of office space construction permits (known as “Tenant Improvements”) issued per calendar year. In general, the downturn in the number of permits coincided with the Great Recession. The Dow Jones was at 13,044 on Jan 2, 2008 and dropped to 9,035 one year later (Jan 2, 2009). Approximately 3 months later, the Dow Jones dropped to 6,507 (March 9, 2009). Since the bottom in March 2009, the Dow Jones has gradually increased to over 18,000 as of 1Q 2015. The number of Tenant Improvement permits issued for Class A & B office buildings did not recover to pre-recession levels until 2014.
NumberOfPermitsVacancyRate

Based on the permit data occurring during the Great Recession, this allows us to see how specific subsections of the office market reacted to the downturn. The charts below are indexed to 2008 permit numbers. The first chart shows permits issued in Class A & B buildings by submarket. As is shown, the West Loop seems to have weathered the Great Recession better than the other two loop submarkets in terms of permits issued as compared to their previous peak.
IndexbySubmarket

The second charts shows permits issued in the Central Loop, East Loop and West Loop broken down by building class (A or B). Class A buildings did not drop as far as Class B buildings, but Class B buildings have increased the numbers of permits every year since 2009.

IndexbyClass

The second part of the permit data is that every permit provides an estimated construction cost number. The charts below outline every tenant improvement permit issued in all submarkets in class A & B buildings broken down by calendar year and estimated construction cost.

This first chart (“Number of Projects”) is a count of the number of permits issued by project value by year.
ProjectValueCategoryV2
This second chart (“Value of Projects”) is the total construction spend by project value by year.
ProjectValueCategoryV2ByCost

This summary chart outlines the findings of the two previous charts. For example, projects that are valued over $10 million only comprise 0.7% of the total number of permits issued between Jan 1. 2008 – April 30, 2015, but they account for 22.1% of the total construction spend.
percentcompare
The chart below shows the average estimated construction cost per permit from 2008-2014 broken down by different subsections of the office market.
AverageMedianPermitCost

I believe this permit data is a good indicator of leasing activity in the downtown office market due to the fact that construction projects are usually tied to a lease event (new lease, renewal, relocation, etc.) Almost any construction project requires a permit in Chicago but for minor cosmetic changes to a tenant’s space. This data also provides a different metric for the market rather than the traditional metrics of vacancy rate and asking rental rates. I also believe this analysis is the first time a tenant can understand how the amount of their construction spend benchmarks against all construction projects occurring in office buildings.