Metro Faces Construction Labor Shortage

CBRE’s Cross says construction labor costs in Phoenix remain low relative to many other US markets.

PHOENIX—Despite the global collapse of commodity prices–including many key inputs to construction– overall construction costs continue to rise nationwide in large part due to labor supply and demand dynamics that first surfaced during the recession and still have yet to resolve, according to a new report from CBRE Group Inc. 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. “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. This is especially true in Metropolitan Phoenix, where construction employment fell by more than 52,000 workers or 40.3% between 2005 and 2015. Conversely, as development has returned to the Valley, the demand for construction labor has caused the average hourly wage in Phoenix to increase by 31.7% during that same time period–second highest among the markets examined in the CBRE report. Cross tells GlobeSt.com: “Despite the strong increase in construction wages since 2005, construction labor costs in Phoenix remain low relative to many other US markets, at 72.6% of the national average as of January 2016.” In addition to rising labor costs, while the US Producer Price Index has showed dramatic price drops for many key construction materials including asphalt, diesel and iron and steel products, the overall price of construction materials has not fallen. The decline in some materials has been offset by increases in other construction products (glass, cement and construction sand, gravel and stone). In addition, local materials prices tend to be sticky–supply-chain issues, contract requirements, project timelines and other factors cause price changes to lag broader trends. “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 added. “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. “Metropolitan Phoenix is definitely experiencing a construction labor shortage. Particularly, we are seeing a lack of depth in the labor pool for quality subcontractors in trade areas like millwork and electrical, among other things,” said Susan LaGanke , CBRE senior managing director of project management, southwest region and multimarkets. “During the downturn a majority of the skilled workforce migrated to busier markets. That labor pool is still not confident enough in the economy to return to Arizona.”