Contractors that supply building interiors have suffered their fair share of adversity in recent years. In 2009, nearly $52 billion was spent on office construction, according to the U.S. Census Bureau. Two years later, that number shrunk to $36 billion—a decline approaching 31 percent. Construction spending decreased even faster in a number of other segments, including lodging, where annual spending fell from $25.5 billion in 2009 to just $9.1 billion two years later—a roughly 65 percent drop. In nominal terms, commercial construction spending, which primarily encompasses retail-related construction, is not expected to return to 2009 levels until 2015.

In addition to the nonresidential construction market collapse, there has been a secular trend toward providing employees with less square footage per worker, often via cubicle arrangements. A survey conducted by the CCIM Institute found large firms, which collectively represent about one-third of all office space use, have moved toward shared or non-dedicated office space. According to CoreNet, the average amount of space per office worker globally recently declined to 150 square feet or less, down from 225 square feet in 2010. Nearly two-thirds of companies responding to the CoreNet Global survey provide 150 square feet or less per person. Slightly more than half of these respondents project an average of 100 square feet or less per worker to be the norm in five years.

Industries that traditionally used a significant amount of space per worker were among the hardest hit by the downturn and have been among the slowest to recover. According to a 2012 Property and Portfolio Research report, the average size of space leased has declined 21 percent during the past 10 years.

CoStar reports law firms,which historically have required some of the most office space, utilized 411 square feet per worker as of mid-2012. At 312 square feet per worker, the federal government is a major user of office space, but with budgetary pressure and policies such as sequestration, this sector represents another source of resistance. Other industries associated with substantial amounts of square footage per worker are financial services (300 square feet), architecture (275 square feet) and insurance (280 square feet).

The Market for Finished Space Recovers

The demand for finished space is now on the rise. In recent months, the nation averaged 200,000 net new jobs per month, with growth in professional services (office or flex space), distribution (fulfillment centers) and health services (physicians’ offices, nursing homes and medical centers) leading the way. During a recent 12-month period, professional and business services added more than 600,000 net jobs, which translates into approximately 100 million square feet of additional spatial demand.

While job growth does not directly result in demand for new construction given high vacancy rates in many central business districts and suburban markets around the country, it often leads to demand in retrofit spaces to make way for new users—many of which are technology workers.

According to CBRE, the technology sector accounted for the “lion’s share of large lease deals” in New York, Seattle, San Francisco and Boston during the second quarter of 2013.  Many financial segments also have begun to recover. According to CBRE, 11 percent of space leased nationally during the second quarter of 2013 went to financial firms such as banks, mortgage companies, and private equity and securities firms. Another 11 percent was leased by companies in business services, including real estate, accounting and consulting. Insurance companies are displaying elevated levels of leasing activity.   

Accordingly, Reed Construction Data forecasts office construction will expand 7 percent in 2014 and another 5 percent in 2015. In the third quarter of 2013, Jones Lang LaSalle reported more than 9 million square feet of office space was under construction in the New York area, 6.6 million in Houston, 5.5 million in Washington, D.C., 4.4 million in Dallas, 3.8 million in Silicon Valley, Calif., and 3.3 million in Boston. All of this space is associated with demand for interior building services. Commercial and lodging construction spending also are expected to expand in 2014.

Looking Ahead
The long-term outlook for interior building contractors and suppliers is highly complex because it’s influenced by economic cycles, the relentless corporate goal of cost minimization, and the growing urgency among universities, government agencies and nonprofits to manage costs more carefully. On top of that are expanding mandates to create space that spurs creativity, preserves energy, and incorporates the latest materials and technology. Users also expect all of these elements will be supplied to them at a cost equal to or somewhat less than their budget.


Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org.