Robust Development Activity Drives Wage Growth

CBRE’s Cross says labor costs tend to have a larger impact on overall cost trends.

HOUSTON—The effects of the recession linger in the construction industry which finds overall costs continuing to rise nationwide, according to a new report from CBRE Group Inc. This is in large part due to labor supply and demand dynamics that have yet to resolve from the recession. In January 2016, average total construction costs in the US registered a year-over-year increase of 1.8%, according to the RSMeans Construction Cost Index (CCI). Since January 2011, the national CCI has increased by an annual average of 2.3%, resulting in a cumulative 11.8% increase during that period. For most markets, annual construction cost inflation accelerated in January 2016, following limited growth in 2015. “The price of materials is just one driver of overall construction costs. 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,” said Andrea Cross , Americas head of office research, CBRE. “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.” Nationwide, the number of workers employed in construction-related occupations declined by nearly 985,000, or 15.8%, between 2005 and 2015, according to the most recent occupational employment statistics survey from the Bureau of Labor Statistics . As a consequence, many markets have faced considerable labor shortages as new construction has picked up 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,” Cross adds. “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—allocating to those projects more man-hours than would be necessary with the best crews.” While total construction costs have registered strong increases during the current economic cycle, appreciation 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% per year for a cumulative gain of 37.4%—more than three times the cumulative 11.8% increase from 2011 to 2015. Cross tells GlobeSt.com: “Robust development activity has driven strong wage growth in the Texas markets. Houston (45.2%), Austin (31.6%) and Dallas/Fort Worth (31%) registered three of the four largest increases in wages between 2005 and 2015 among the markets in the report, with Phoenix also ranking high (31.7%). However, wages in these markets also are among the lowest in major US markets and thus had further room to increase compared with already high-cost markets like New York, Chicago and San Francisco.”