Some Secondary Markets Have Tempered Rising Construction Costs

It is little secret that materials costs have been extremely volatile this year, with almost all construction materials, including steel, lumber, glass, concrete and gypsum, posting cost increases. These materials costs are generally inflexible, and developers find relief in adjusting labor costs and the project timeline to offset high materials fees. However, the pandemic limited flexibility for developers to adjust soft costs, fueling cost inflation.

Despite rising development costs, emerging secondary markets have remained relatively affordable for new development, according to the Development Opportunities Index from CBRE. Orlando and San Antonio topped the index as the lowest-cost markets. Multifamily and industrial projects are driving the development activity, while San Antonio has some of the lowest land prices in the index. Memphis, Kansa City and Jacksonville also made the list of the most affordable construction markets, according to the report. Low land prices were a key factor in the affordability for each of these markets.

The larger landscape, though, is one of rising costs, despite these bright spots. 

Social distancing restrictions that impacted the timeline of construction, limited supply materials and a decrease in labor all drove an overall increase in construction costs this year, according to the Development Opportunities Index from CBRE.

This, of course, is part of an ongoing trend: Construction costs have doubled over the last two decades. The RSMeans Index Score has grown from 126.7 in 2002 to 234.6 in 2020, and the average hourly rate increased from $16.56 per hour in 2000 to $25.28 in 2019. Labor, materials and regulation have driven the increase in costs, but the pandemic exacerbated rising costs.

At the start of the pandemic, though, it wasn’t clear what direction construction costs were headed and some developers predicted a decrease. Initially, many projects were canceled or postponed, triggering dramatic industry-wide layoffs. In April, 830,000 construction workers lost their jobs, but since, 1 million new construction jobs have been created. Many workers were re-hired on delayed projects once construction resumed.

Now, many markets are already seeing a rebound in construction activity. As one example, Los Angeles’ construction pipeline reached a new record with 39.5 million square feet under construction, a number that the market has not seen since the 1980s, with additional 127 million square feet of proposed projects, according to an earlier report from CBRE. Like the other markets, multifamily and industrial are dominating new development activity.