Early on during the pandemic, many construction projects around the country seized to a halt. In an encouraging sign, most of these job sites have since opened back up. But there’s a catch: as crews tackle the backlog, they are outpacing new projects entering the pipeline.
The one silver lining of entering a recession is that constructions costs—which have risen steadily every quarter seemingly since humankind first began keeping records—will course correct. According to Rider Levett Bucknall’s (RLB) latest Quarterly Cost Report for North America, the national average for construction costs rose by approximately 0.41 percent (4.13 percent annualized).
While still an increase, this number deviated more toward stagnation than the trajectory anticipated by previous quarters. Some markets like Denver, Los Angeles, Phoenix, San Fransisco, and Seattle experienced increases above the national average; other cities—including Chicago—had construction costs that fell below the national average.
RLB compiled construction cost information for 14 U.S. and Canadian markets through April 1, 2020. Their data provides a statistical view of the state of the construction industry, detailing indicative construction costs for eight building sectors: office, retail, hotels, healthcare, industrial, parking, residential and education.
In Chicago, according to RLB data, the construction of prime office space ranges between $280 and $450 per square foot. That asset type would cost between $400 and $600 per square foot in New York, or $350 to $550 per square foot in Boston or San Francisco. Las Vegas had the cheapest costs for new prime office space, ranging from $160 to $295 per square foot.
Chicago again falls in the middle for industrial warehouse space. These facilities are cheapest in the desert, going up for somewhere between $60 to $100 per square foot in Las Vegas or Phoenix. San Francisco has the priciest range for industrial product, between $175 and $250 per square foot. Chicago comes in at between $110 and $185 per square foot, which is comparable to Boston, New York and Portland.
RLB also performs a comparative cost index for 12 U.S. cities, showing cost differentials in each particular market and how they compare against the costs in the other 11 locations. This “true” bid cost of construction includes taxes, as well as general contractor and subcontractor overhead costs and fees, in addition to the costs of labor and materials.
Of the 12 markets that RLB indexed, Chicago experienced by far the lowest annual change of 1.41 percent. Portland had the next-lowest index with a 3.05 percent increase and Los Angeles and San Francisco saw the greatest increases, with 5.48 and 5.54 percent, respectively.
Typically, markets experiencing a boom see more rapid construction cost surges as overhead and profit margins increase in response to intensifying demand. Similarly, markets in a bust will see dampened construction cost increases—or even reversals—as overheads and profit margins reduce.
Signs of the pandemic’s influence were evident in other metrics. Over the prior three quarters, the Architectural Billings Index—an economic indicator developed by the AIA to track commercial construction activity—has ranged between 49.1 and 52.5. A score below 50 indicates declining billings. Evidence of the pandemic’s impact was evident in this metric, as the Architectural Billings Index for Q1 2020 dropped precipitously to 33.3 points.
Culling construction unemployment rates from U.S. Bureau of Labor Statistics data, a recurring trend of rising and falling construction employment became evident during the past decade. Poor weather over the winter months drove unemployment up every year, only to see those levels fall in the spring and summer.
Each year during the last cycle, the peaks and valleys of this fluctuating unemployment fell lower and lower. The highest point that construction unemployment crested to in 2019, for example, was half that of the best levels that the industry experienced in 2010.
The pandemic, of course, obliterated this trend. Construction unemployment rose to 6.9 percent during March and then to 16.6 percent in April—the highest rate since March 2012. The shut down of many construction sites due to COVID-19 led to lay offs and furloughs during this time. Since then, however, stay-at-home orders have begun to lift and many workers are returning to job sites, tamping down unemployment for May at a reported 12.7 percent.
Though it will be a long time before unemployment levels attain pre-pandemic levels, construction unemployment should continue to trend down for the remainder of 2020. The immediate outlook for the economy—which experienced its first negative growth in six years—remains murky. That said, there is reason to be optimistic in the long term.
“The remote-working conditions caused by the pandemic forced companies to accelerate their adoption of digital processes,” said Julian Anderson, FRICS, president of RLB North America. This redoubled emphasis on technology, according to Anderson, will push the industry to adopt more efficient construction methods—a cost-saving measure that will also allow companies to be nimbler during future outbreaks. The only question now is how soon owners and developers will be ready to begin new projects and test out these leaner building techniques.
