The Mortenson Construction Cost Index reflects a continued slowdown of the cost increases experienced over the last two years. In fact, the overall outlook for non-residential construction is positive, with cost increases continuing to slow or remain flat and material availability and lead times showing greater stability than in previous quarters.
Here are the facts:
After a slow start to the year, construction starts rose nearly 20% in March, according to Dodge Construction Network, with gains in manufacturing and other sectors lifting non-residential building starts by 33%. That’s on top of a 2022 year-over-year 15% increase in starts compared to 2021.
Although higher interest rates are still at play, recent signs by the Fed indicate the current cycle of rate increases might have concluded. Despite the interest rate environment, employers continued to add jobs across Q1, with the unemployment rate remaining at a 3.5% low in March.
Inflation and interest rate increases are having an impact on certain construction costs, decreasing lumber prices by 18%. Waning consumer demand and lower import volumes have also decreased the cost for domestic freight, easing supply chain concerns as capacity becomes available in tandem with demand continuing to slow from the pandemic’s peak.
Still, Mortenson said labor issues in the construction industry are still a concern, with reports of tight labor markets and regional worker shortages in many regional markets. As construction starts increase and larger projects compete for laborers, many projects are paying incentives to secure workforces.
National nonresidential construction costs increased this quarter by 0.6%, which represents a 5% increase year over year, with the majority of cost increases occurring in Q2 2022. Continuing a trend from the previous quarter, Mortenson regional markets reported little to no change in total construction costs, with some markets remaining flat or even showing slight decreases.
The regional markets with an overall observed increase in Q1 include Milwaukee (1.1%), Seattle (1.1%), Chicago (1%) and Phoenix (1.5%). Geographic markets showing slight decreases in Q1 included Denver (-0.3%) and Minneapolis (-0.1%), with Portland reporting flat costs overall for the quarter.
Based on the data, Mortenson remains cautiously optimistic as demand for construction remains robust despite broader softness in the economy and the company recommends customers remain adaptive relative to local markets, as growth in construction activity will continue to create stronger demand for labor and affect workforce availability for the rest of 2023.
