Construction costs may escalate 14.1% this year, but relief expected soon
By Ashley Fahey
Tampa Bay Business Journal
Published: Aug 25, 2022

Since the onset of the Covid-19 pandemic, record-high construction costs and delays have plagued the development and homebuilding industries — and while pricing has recently started to moderate, relief likely won't be felt until next year.

That's according to CBRE Group Inc. (NYSE: CBRE), which is forecasting a 14.1% annual increase in U.S. construction costs by the end of 2022, thanks to industry labor shortages, inflation, supply chain disruptions, ongoing impacts from the Covid-19 pandemic and the war in Ukraine. That annual price increase, if it occurs, would outpace the 11.5% escalation in construction costs seen last year.

Nicolas McNamara, director of cost consultancy at CBRE, said it's typical in pre-construction to factor in construction-cost escalations of between 2.5% to 3.1%, to put the projected 14.1% annual jump in perspective.

He said some pricing has recently become less volatile and is coming off yearly and all-time highs. In 2023 and 2024, CBRE is expecting cost escalations of 4.3% and 2.9%, respectively — a drop-off in the rate of increase, to be sure, but still an increase in pricing after the double-digit jumps of the past two years.

McNamara said many contractors are pre-purchasing materials to stave off issues around obtaining materials.

"When you have everyone pre-purchasing materials, a lot of people are front-loading cash flows and schedules to make sure they have the labor and materials," McNamara said.

One key factor still to be figured out: whether a slowdown in construction is coming — and, if so, the extent of it — and whether that could ease some of the demand and, subsequently, price hikes.

McNamara said a lot of projects that were started after the dust initially settled in the early days of the Covid-19 pandemic wrapped in the first half of 2022. Total spending for U.S. construction has increased 16% between January 2020 and March 2022. When adjusted for inflation, construction spending is up 4.4% since January 2020, CBRE found, underscoring how much commercial and residential construction has taken place since the pandemic.

Already there's been a slowdown in residential construction. Overall housing starts fell 9.6% to a seasonally adjusted annual rate of 1.45 million units in July, according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Single-family starts specifically decreased 10.1%, to a seasonally adjusted rate of 916,000, and are down 2.1% on a year-to-date basis.

Despite challenges associated with construction cost increases, Dallas-based Trammell Crow Co. (a subsidiary of CBRE) hasn't had to cancel any projects because of construction costs, said Nancy Moses, executive vice president at the company.

"I think it’s really important now more than ever to bring the general contractor and subcontractors into the fold and design as early as possible, so we’re really digesting all of the factors that impact the construction, and help us think about the design and what we’re proposing and what we’re presenting for our project, in order to mitigate the issues we see," Moses continued.

Like most developers, Trammell Crow is building in contingencies around risks that include, but aren't limited to, the cost of construction.

Given the higher cost of capital thanks to rising interest rates and broader economic uncertainty, it's crucial to understand a market, supply and demand, and where rents are heading when mapping out a development, Moses said.

"Right now, rents continue to grow, so that is a factor in how we’re analyzing a deal," she continued. "We need to be constantly looking at all of those factors."

Demand has been artificially high for the past two years because of pandemic disruptions, McNamara said, and the industries associated with development are finally getting past that peak, which should eventually result in less-sharp increases in construction costs.