Here’s when construction costs should return to more normal levels
Construction costs are forecast to rise 14% this year, but increases are expected to drop significantly starting next year.
CBRE’s Construction Cost Index says the price paid for goods and services on new nonresidential construction jumped 42% between March 2020 and March 2022. That doesn’t include labor costs, which have also increased. Since the pandemic began, various steel products, plastic piping and wood costs have more than doubled.
In 2023 and 2024, CBRE expects annual increases will return to historical averages between 2% and 4%. The report says:
“Overall cost inflation for materials is expected to begin cooling 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–costs for some materials may remain volatile.”
The report says supply-chain disruptions should begin 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-related restrictions, supply chain disruptions, labor shortages and the war in Ukraine — are spurring rising costs and uncertainty across the construction industry.
- The construction industry faces numerous labor challenges, including a smaller talent pool in the aftermath of the Great Recession, an aging workforce — one in five workers is currently older than 55 — and strong competition from other industries like logistics.
- Labor shortages are expected to persist for the near term, increasing wage pressure. Because construction wage growth has lagged the national average through the pandemic, construction labor escalation is likely to be higher in 2022.
- As demand for new construction projects increases, contractors may be able to pass along higher input costs. The extent to which this happens will depend on how many builders delay or cancel projects due to concerns over input prices, rising interest rates and economic uncertainty.
- Despite headwinds, construction demand is expected to remain strong for the near term. Although the possibility of an economic downturn should be taken seriously, considerable pent-up demand for new construction — including a nationwide housing shortage — and government infrastructure projects should largely sustain activity. As contractor backlogs grow, margins should increase, pushing up total construction costs.