Consulting firm Rider Levett Bucknall recently released a report that said US construction spending is at its highest level since 2008. An analysis by GlobeSt.com claims that while it’s an overall good thing for commercial real estate and, therefore, the construction industry, the bad news is that it’s due partly to an increase in construction costs during the second quarter.
The culprit for these increased costs is a familiar one: a lack of skilled labor and difficulty in acquiring it.
“Much of this increase can be attributed to the lack of available skilled construction workers to support increased demand within the industry—a trend that will most likely become more severe as demand continues to grow,” the report stated. “As a broader-based recovery for the construction industry continues, it appears that this may come hand-in-hand with increased levels of construction cost escalation which have not been experienced for some time.”
The report goes on to note that the labor shortage is the most severe in oil boom states such as Texas and South Dakota but major cities such as New York are also feeling the labor pinch. RLB tracked construction costs in 12 major US cities and found that between April 1 and July 1, the national average increase in construction cost was 1.38%, the largest increase in the past 6 years. Boston, New York, San Francisco and Washington, DC, all experienced increases between 1.5% and 1.67% for the period, while Honolulu topped the list with an increase of 3.04%. All other locations experienced gains ranging from 0.69% (Los Angeles) to 1.27% (Chicago), with Denver, Las Vegas, Phoenix, Portland and Seattle each falling somewhere in between.
Unlike other cost trackers, RLB’s Comparative Cost Index tracks the “true” bid cost of construction. In addition to costs of labor and materials, it includes general contractor and subcontractor overhead costs and fees. Its index also includes applicable sales/use taxes as costs.
The report, again, shows the fragility of the economic recovery, particularly in commercial construction. Unemployment hit a 14-year-low recently, but construction jobs are still going wanting. CMD (formerly Reed Construction Data) provides a nice statistical breakdown of state-by-state construction unemployment rates from 2008 to today. The data confirms what RLB found, that unemployment is going down but skilled labor is becoming harder to find. Those fixed costs will continue to go up unless the industry gets a much-needed infusion of youth.