Material, Labor Shortages Push Construction Completions to New Lows

Construction completions fell further in the second quarter after record lows in the beginning part of this year, compounded by material and labor shortages and continuing COVID-19 woes.

New research from Moody’s Analytics REIS shows that construction activity remained subdued in Q2, with all major property types posting declines in excess of 30%. Approximately 21,410 apartment units and just over 4 million square feet of office space were completed, marking the lowest apartment and office completion figures in nearly a decade. The 39,000 square feet of new retail space is the smallest amount recorded over the two decades since Moody’s began tracking such figures.

One potentially welcome byproduct of the constrained supply: it likely suppressed negative market pressures across the markets, according to Moody’s Senior Economist Thomas LaSalvia.

“While structural changes regarding how we live, work, and shop continue to alter demand, the limited new supply acted to create stability in the market,” LaSalvia says. “Overall, effective rent increased for the first time in over a year for both the apartment and retail sectors, while office sector effective rent was down just 0.3% for the quarter. The vacancy rate for apartments and retail was flat, while office realized an increase of 30 basis points.”

The apartment sector enjoyed solid rent growth, thanks to strong demand across markets in Texas and the South Atlantic regions and weak inventory gains. More than 2 million people found employment this quarter, a key driver of multifamily performance, and supply during the quarter was limited, clocking in at 60,000 new units delivered. LaSalvia predicts “solid rent growth” for the remainder of the year in the sector.

On the other end of the spectrum, office completions were well below recent quarterly numbers, coming in at 4 million square feet. Effective rents were down 0.3% and vacancy shot up 30 basis points.  Sublease availability is also up by as much as 60% in some markets, according to Catylist data analyzed by Moody’s.

And “the concern over the future of retail is certainly showing up in the development market,” according to LaSalvia, with just 39,000 square feet (representing projects in San Antonio and Detroit) brought online in the quarter.

Overall, he says, “the pullback in supply growth has undoubtedly helped to subdue rent and vacancy stress.”

“As these projects come online, we still expect negative pressure to show, especially for office and retail. These sectors will continue to be strained by structural changes in how we work and shop, although the expected declines are now likely to be limited in scope,” LaSalvia writes.