The Construction Conundrum

Contributors

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

August 2016

How labor shortages impact commercial real estate

The U.S. construction industry lost nearly 2 million jobs between 2007 and 2010 as a result of the financial crisis, more than any other segment of the economy. To some degree, this was not surprising, given the numerous pockets of overbuilding that preceded the recession; however, only 40 percent of these workers have returned to the industry, despite seven years of a moderately strong recovery. This is equivalent to a city almost the size of Dallas disappearing from the construction labor pool. With such a massive and prolonged shortage of skilled labor, real estate investors should consider the question, “What happens when you lose a generation of construction workers?”

Counting the costs

A labor shortage impacts construction costs almost immediately. The Turner Building Cost Index (designed to track nonresidential construction) rose 4.5 percent in 2015 and is on pace to eclipse this figure in 2016, which would be the largest total since 2008 and the fourth consecutive year in which growth was above 4.0 percent. While these figures slightly trail the long-run average of 4.9 percent (dating back to 1967), the recent annual increases stand out because they are more than double U.S. inflation over the same period. Both material prices and labor market conditions are critical factors in determining construction costs, and material prices have experienced 17 consecutive months of year-over-year decreases as of April 2016, propelled by the recent global commodities slump. Yet, overall construction costs continue to rise, which suggests the shortage of skilled workers has not only outweighed the recent drop in material prices, but also could continue to cause costs to surge as construction pipelines expand.

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