Project Costs Are Changing the CRE Landscape

For some time, a lot of commercial real estate news has focused on the pain of macroeconomics—inflation, labor shortages, and supply chain disruptions.  According to a new analysis from Gensler, that’s causing developers and tenants alike to better direct and prioritize their spending.

That there would be an impact on strategy and business planning shouldn’t be a surprise. Building commodities have been expensive all through the pandemic. By February, material prices overall were up 20.3% year over year. And lumber spot prices are again over $1,400 per thousand board feet. Still shy of the over $1,600 back in May 2021, but not by that much.

However, while the ongoing pandemic shocks have driven many prices to historical highs, this isn’t an issue of the last two years. The data for the analysis was “sourced from more than $7 billion in actual hard costs from more than 1,000 U.S. interior design projects completed between 2017 and 2021 across more than 70 major markets.” 

The firm said that median hard construction costs per usable square feet have increased 8% annually since 2017—a 35% increase over the period. Looking at the graph of the data, that also isn’t heavily concentrated in the last two years. 

The northeast and northwest remain the most expensive places to build out workplace interiors. San Francisco and New York City respectively had median costs per usable square foot of $232 and $226 in 2021. Seattle and Boston came in at numbers three and four with $199 and $181. The national median was $157. On the lower end were Phoenix, Arizona and both Raleigh-Durham, and Charlotte in North Carolina: $115, $110, and $108.

Since the pandemic, small projects saw “minimal” delays, on the order of a month. Large projects, on the other hand, were “significantly delayed by labor shortages and supply chain constraints” by six months.

The first of three key lessons is that mechanical, electrical, plumbing, and general conditions costs rose faster (15% to 17%) than costs for design elements. Second, clients and contractors should plan for delays driven by supply chain and labor issues, particularly on larger projects. Third, a focus on design elements that “amplify experience” opens a door to “optimize value.” As that third category has grown only by 5%, the more that can be done with it, the less a project might depend on the categories that have jumped more.