Construction Costs

Contributors

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

January 2019

Counting Construction Costs: Commercial Real Estate Implications of a Trade War & Skilled Labor Shortage

The Turner Building Cost Index – which measures costs of non-residential building construction in the United States – is up nearly 6% year-over-year as of third quarter 2018, on pace for the highest annual increase in a decade. Strong construction activity has certainly played a role in driving up costs, but the shortage in skilled labor and escalating trade tensions appear to have exacerbated the situation. This article will highlight some of the implications for the commercial real estate (CRE) markets given the current construction cost outlook.

LOOKING FOR LABOR

The U.S. construction labor pool lost nearly a third of its workers in the aftermath of the Global Financial Crisis (GFC), spurring higher project development costs. According to the Bureau of Labor Statistics, the number of construction workers has yet to return to its pre-recession peak, and tight labor conditions are likely to persist given supply pipelines are near record levels, or cycle highs, across all major property types. Nearly 60% of contractors reported a skilled labor shortage in the U.S. Chamber of Commerce’s most recent commercial construction survey as of third quarter of 2018. The robust employment market seems to have compounded the labor shortage, as the unemployment rate fell to 3.7% in the second half of 2018, the lowest in nearly 50 years. The dearth of skilled workers may be the employment market’s most significant challenge today, as tightening labor conditions could ultimately limit economic growth, and thus real estate supply, in the years ahead.

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