Here’s when construction costs should return to more normal levels

Construction costs are expected to rise 14% this year, but increases are expected to drop significantly from next year.

CBRE’s Cost of Construction Index indicates that the price paid for goods and services in new non-residential construction jumped 42% between March 2020 and March 2022. This does not include labor costs work, which also increased. Since the start of the pandemic, the costs of various steel products, plastic piping and lumber have more than doubled.

In 2023 and 2024, CBRE expects annual increases to return to historical averages between 2% and 4%. The report says:

“Overall material cost inflation is expected to begin to subside by the end of 2022 and largely return to typical levels by mid-2023. However, given the large number of construction inputs – many of which are often subject to geopolitical risks such as tariffs and sanctions – the costs of certain materials can remain volatile.

The report says supply chain disruptions should start to ease, but ongoing global labor shortages will hamper production and logistics.

CBRE Construction Cost Index Highlights:

  • A confluence of events – including soaring construction demand, inflation, pandemic restrictions, supply chain disruptions, labor shortages and war in Ukraine – drive rising costs and uncertainty in the construction industry.
  • The construction industry faces many labor challenges, including a tighter talent pool following the Great Recession, an aging workforce – one in five workers currently over 55 – and strong competition from other industries like logistics.
  • Labor shortages are expected to persist in the near term, increasing wage pressure. Given that construction wage growth has been below the national average during the pandemic, the escalation in the construction workforce is expected to be higher in 2022.
  • As demand for new construction projects increases, contractors may be able to pass on higher input costs. The extent to which this happens will depend on how many builders delay or cancel projects due to concerns about input prices, rising interest rates and economic uncertainty.
  • Despite the headwinds, construction demand should remain strong in the near term. While the possibility of an economic slowdown should be taken seriously, considerable pent-up demand for new construction – including a nationwide housing shortage – and government infrastructure projects should largely support activity. As contractors’ order books increase, margins are expected to increase, driving up total construction costs.

Comments are closed.