Labor Shortages Are Driving Up Construction Costs, Says CBRE

A new research report from CBRE says that despite the global collapse of commodity prices — including many key inputs to construction — overall construction costs continue to rise nationwide. This is largely because of worker shortages that have driven up labor costs, offsetting any savings on materials.

In January, average total construction costs in the United States registered a year-over-year increase of 1.8 percent, according to the RSMeans Construction Cost Index (CCI). Since January 2011, the national CCI has increased by an annual average of 2.3 percent, resulting in a cumulative 11.8 percent increase during that period.

“The price of materials is just one driver of overall construction costs,” says Andrea Cross, head of research for the Americas at CBRE and co-author of the report. “The cost of construction labor tends to be much more variable across geographies and over time, so it typically has a larger impact on overall cost trends.”

Cross also notes that the collapse of the housing market and subsequent recession affected supply-side dynamics for new construction throughout the country, as a substantial number of construction workers left the industry during the downturn and never returned.

Nationally, the number of workers employed in construction-related occupations declined by nearly 985,000, or 15.8 percent, between 2005 and 2015, according to the Bureau of Labor Statistics (see chart). Many markets have faced labor shortages amid an uptick in new construction during the current economic cycle.

“When the number of new construction jobs began to grow without a proportional increase in qualified construction workers, tighter labor markets conditions pushed wages upward,” explains Cross. “The effect was compounded by increased fees from contractors who charged more not just because they could now afford to be more selective, but also because they were stretched across a larger number of projects and would need to use less-experienced crews for some projects.”

In addition, while the U.S. Producer Price Index (PPI) has showed price drops for many key construction materials including asphalt, diesel, iron and steel products, the overall price of construction materials has not fallen.

The decline in some materials costs has been offset by increases in other construction products such as glass, cement, construction sand, gravel and stone. Local materials prices also tend to be sticky, as supply-chain issues, contract requirements, project timelines and other factors cause price changes to lag broader trends.

Construction cost increases in several major metropolitan areas have outpaced the national average since January 2011. In the past year, Atlanta and Los Angeles saw especially steep CCI increases — 3.8 percent and 3.5 percent, respectively. For most markets, annual construction cost inflation accelerated in January 2016 following limited growth in 2015.

While total construction costs have registered strong increases during the current economic cycle, the rise has been significantly slower than in the previous cycle. Between January 2004 and January 2009, the national CCI increased by an average of 6.6 percent per year for a cumulative gain of 37.4 percent, which is more than three times the cumulative 11.8 percent increase from 2011 to 2015.

— Haisten Willis

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