Construction & Associated Costs – What Could Happen?

What’s in store for 2023 when it comes to construction and associated costs?  As with most things, only time will truly tell.  What we do know is over the past year, inflation and interest rates have soared and from the war in Ukraine to lingering pandemic stresses, impacts on certain construction materials, amongst most other things, have been affected. Compound this with a labor market having a hard time attracting workers in the past year, and the construction industry has been struggling.

At the beginning of 2022, the main concerns of materials were primarily focused on prices of lumber, but as the year went on that has shifted to various others, specifically fuel and cement. The high volatility of materials makes it difficult to plan jobs and projects across the industry.  Per Construction Dive’s interview of Ken Simonson, chief economist at the Associated General Contractors of America, “Cement and concrete products are likely to have continuing shortages as the nation has not added any cement production since 2009 while demand is growing, particularly from infrastructure projects.”

Source: Construction Dive

In general, the construction industry struggled with having enough workers, causing the cost of labor to increase tremendously, along with vendors being selective on projects. While growth in wages has trailed over the years, the tight labor conditions could spark growth in 2023. Also, with the upcoming federal spending, further attraction to the industry could occur.  Workers could view this as stability in the job market which in an industry of volatility, would likely be welcomed.

One thing rising construction material costs, along with labor costs, does do is provide a bit of relief to existing landlords from the development of new supply.  Per JLL, “The producer price index for construction materials has accelerated at twice the pace of the CPI during 2022, wage growth in the construction sector has outpaced other private industries, and policy rates have increased 375 basis points since January—all causing costs of development to swell, while asset pricing in private and public markets has declined notably.”  This could potentially bridge the gap between office supply and demand levels.

Source: JLL Research, BLS.

While overall it is difficult to predict what is going to happen to material costs, certain signs potentially indicate that there could be some light at the end of the tunnel. An anticipated recovery of the economy after the pandemic and various governments allocating funds towards infrastructure projects could increase the supply of materials and potentially lower their costs, but again, only time will tell.

 

Sources:

• Construction Costs | CBRE
• 5 charts that hint at what’s in store for construction in 2023 | Construction Dive
• Rising construction costs increasingly pressure new development (jll.com)
• The Impact of Rising Costs in Construction: How to Stay Ahead of the Game (yahoo.com)

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.