Construction Costs Continue to Rise in 2020

Even before challenges presented by the coronavirus pandemic, high construction costs were making some deals impossible to pencil.

The COVID-19 outbreak has impacted the construction industry with a tsunami of uncertainties. Municipalities are shutting down non-essential construction sites temporarily in response to the pandemic while simultaneously preparing to order construction of new medical facilities. One thing is certain, however, construction costs will rise again in 2020.

What does it cost to build a commercial building?

Fundamentally, cost increases are expected to accelerate as public policy demands are directed at the existing projects underway and new healthcare facilities come online. The art of construction cost estimating is always a balance of subcontractor and general developer experiences balanced with current material considerations. Gordian provides an extensive construction cost database through their RSMeans data products. RSMeans data (see below) allows for the estimation of hard costs based on location, for material and labor costs.

TOP 10 MSA BUILDING COSTS

Source: Data provided courtesy of Gordian. Numbers are based on the RSMeans data standard conceptual of five- to 10-story office buildings defaulted to 80,000 square feet

BOTTOM 10 MSA BUILDING COSTS

Source: Data provided courtesy of Gordian. Numbers are based on the RSMeans data standard conceptual of five- to 10-story office buildings defaulted to 80,000 square feet.

Why are construction costs so high?

In 2019, construction costs rose nationally by 2 percent, and they are predicted to continue to rise this year, said Tim Duggan, vice president of Data and Analytics for Gordian. These increases have been driven by a shortage of labor and increasing prices for materials. Which factor is most responsible for higher construction costs?

“I would say that at this point they are probably equivalent,” said Duggan. “Both are competing as drivers. Tariffs have a very quick but short-term drive up on costs which then settle back down, while wages seem to be a continuing issue for driving up the cost.”

How are construction costs impacting developers?

Tim Duggan, vice president of Data and Analytics for Gordian.  Photo courtesy of Gordian

The difficulty of acquiring skilled labor has impacted construction of all asset classes in terms of higher costs as well as delayed timelines. “Labor is one of the biggest challenges that our construction partners think they will face in 2020,” said Paul Vastag, vice president of Business Intelligence for Continental Properties. “…the one thing that can and will slow down the supply pipeline is construction costs.”

Continental is sharing the pain of many developers who are finding their projected returns on new developments reduced to the point where it is impossible to achieve sufficient returns in many markets. “The increase in construction costs is continuing to make deals more and more difficult to pencil,” said Ryan Folger, executive vice president of Design and Construction at Continental. Continental is exploring new methods and technologies that will allow them to build faster and more efficiently and to continue achieving good returns for their investors.

Coronavirus and Construction Costs?

The supply chain delays caused by the Wuhan quarantine are forcing developers to either seek out costlier alternatives for materials or endure construction delays. Uncertainty about the ultimate effects of the virus is causing delays to new construction starts also. Ken Simonson, chief economist at Associated General Contractors, told CPE a month ago that “there are plenty of projects that broke ground or are far enough along that they will continue to be built out… people are going ahead with projects that were in advanced planning stages as well as projects that have already broken ground.”

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