The shortage of qualified trade workers continues to be a prime concern for the construction industry. This dearth of workers, along with the country’s threatened or actual use of tariffs, means that the meteoric rise in construction costs is only expected to continue.
According to the second quarter construction cost report from Rider Levett Bucknall (RLB), between January 1, 2019 and April 1, 2019 the national average increase in construction cost was appropriately 1.12 percent (4.48 percent annualized).
Chicago, Honolulu, Phoenix, Portland, San Francisco, and Seattle all experienced increases above the national average during the second quarter. Other locations have had more modest gains and Los Angeles was the only city to experience a decrease this quarter.
Construction-put-in-place during April 2019 was estimated at a seasonally adjusted annual rate of $1,298.5 billion, according to U.S. Department of Commerce data. This is in step with the revised March estimate of $1,299.2 billion but 1.2 percent below the April 2018 estimate of $1,314.7 billion.
The report from RLB, an international property and construction consultancy firm, features construction cost construction costs for eight building sectors across 14 U.S. and Canadian markets.
“As the industry continues to adapt to a chronic craft-labor shortage and on-again/off-again trade wars and tariffs, several markets appear to be softening as they enter the ‘valley’ part of the construction cycle,” said Julian Anderson, FRICS, president of RLB North America.
Chicago’s 2.11 percent quarterly cost increase during the second quarter was the most after San Francisco, which saw a 2.50 percent increase last quarter. However, none of the 14 markets that RLB tracks saw a larger rise in construction costs year-over-year that Chicago, where prices rose 8.77 percent from April 2018 to April 2019.
While Chicago leads the pack in terms of construction cost rise, actual costs are higher in other markets. The per-square-foot cost to put up a retail shopping center in Chicago is between $185 and $290, according to RLB. That figure ranges between $275 and $425 in New York; in Denver, on the other hand, a shopping center can be developed for between $95 to $150.
Other construction costs for the Chicago area, per RLB data, indicate that a five-star hotel will cost $400 to $660 per square foot; that range drops to $290 to $410 for a three-star hotel. Per-square-foot costs for warehouses are $110 to $185 and for multifamily buildings the range is between $165 and $400.
RLB pointed to several key fiscal barometers to help gauge where the economy stands at the moment. The U.S. GDP closed out Q1 2019 at 3.2 percent, up from the 2018 year-end of 2.6 percent. Construction unemployment is holding steady at 5.2 percent, a nominal change from Q1.
However, the AIA’s Architectural Billings Index was the lowest it has been in five years at 47.8 in March 2019. That figure has been adjusted to 49.1 for June, which is an increase but still a troubling number. According to the AIA, nearly 40 percent of firms have seen a direct impact on their projects from tariff-related concerns.
Placing these rising construction costs into perspective, the Associated Builders and Contractors’ Construction Backlog Indicator (CBI) expanded to 8.9 months in May 2019, up 0.2 months or 2.2 percent since April 2019, when CBI stood at 8.7 months. From 2011 through 2018, the monthly backlog of nonresidential projects is up 17 percent. With a 9.15 month average duration in 2018, the CBI is the highest in a decade.
“Nonresidential construction spending continues to be a significant source of economic strength in America, and the latest Construction Backlog Indicator strongly suggests that nonresidential construction spending will continue to be a major driver of business revenue growth and employment,” said Associated Builders and Contractors chief economist Anirban Basu. “Despite concerns about the rising costs of material prices and labor impacting construction contracts, demand for nonresidential construction services remains elevated for now.”
According to Basu, nonresidential construction spending patterns currently lag the broader economy by 12-18 months. This is to be expected as nonresidential construction typically doesn’t keep pace with other sectors early in an economic recovery, though it can continue to see robust growth during the late stages of economic expansion.
With financial market performance, job creation, income growth and consumer spending all pointing to economic conditions with continued momentum, contractors can expect several additional quarters of spending growth.