2Q CRE Construction Cost Increases 2.4%

Rider Levett Bucknall, Phoenix, reported commercial real estate construction costs increased 2.4% during the second quarter.

Construction costs are now up 7.5% on average year-over-year, RLB said in its midyear Quarterly Cost Report, which studies construction activity in 14 key North American markets.

The main driver of increased costs is not enough workers, RLB said. “The workforce shortage is pervasive through every aspect of our industry right now,” said Julian Anderson, President of RLB North America. “While the workforce shortage is just one piece of a larger set of challenges we are facing right now, it’s important we strive to have the appropriate workforce numbers in place as we prepare for the future.”

Chart courtesy of RLB.

The report noted the workforce shortage is decreasing the amount of construction activity that can take place. “In the past two months, spending on nonresidential construction has declined, with many industry experts attributing this to the workforce shortage,” RLB said.

While workforce shortages are not a new challenge in commercial real estate construction, the current shortage heightens other issues including the pandemic, supply chain challenges for raw materials and finished products and rising fuel prices, RLB said.

Another RLB report, the National Construction Cost Index, tracked average cost escalation across 12 U.S. cities to calculate the hypothetical change in bid pricing. The RLB NCCI jumped from 218.06 to 234.42 on a year-over-year basis.

But new development projects are entering the planning cycle quite steadily despite increasing construction costs, higher mortgage rates and fears of a recession, RLB noted. “While rising pricing and labor shortages may cause projects to start later in 2022 or early in 2023, they give hope that the construction industry will be able to endure an economic slowdown fueled by higher interest rates,” the report said.