Falling Construction Wages Sending Mixed Signals

If you didn’t notice: Construction wages in some CRE sectors are falling, sending mixed signals.

Nick Grandy, construction and real estate senior analyst with RSM US LLP, tells GlobeSt.com, “We are at an inflection point in the construction labor market as the market is beginning to soften with the continued challenges from inflation and expectations for a recession.”

In July, residential construction wages dropped to $29.13 from $29.41 in June, while non-residential construction wages were flat for the month at $34.87 and specialty trades saw wages grow to $32.14 from $32.

On a year-over-year basis, residential construction wages are up 3.4%, but there has been higher than usual annual growth throughout the pandemic with year-over-year growth rates averaging 6% to 7% during 2021.

“When we look forward, there are multifaceted happenings, which are offering different signals to construction companies,” Grandy said.

“With rising interest rates, it is much harder for developers and property to pencil out deals as the cost of debt has increased and apartment rental rates are falling [according to data from CoStar]. This means that the pipeline for new projects will likely slow which in turn creates a slowdown in labor.”

Trades Jobs Lost Not Being Replenished

Single-family housing has also seen a large number of home starts over the past two years, but completions have remained relatively consistent, with a large number of homes still under construction due to issues within supply chains and finding labor to get projects to completion, Grandy said.

“As starts continue to fall and the market softens, this trend will likely fall back in line with units under construction being in line with completions.”

In terms of labor, there were still 375,000 job openings in construction according to the JOLTS data released in July and unemployment was at 3.9% in August 2022 (which is just off record lows seen in September 2019).

“There will likely continue to be labor shortages within the industry overall as there has not been a replenishment of workers entering the skilled trades to replace those leaving the industry,” Grandy said.

“The best thing a contractor can do in the current market is to ensure that forecasts are accurate for what is known today, and that current staffing aligns to these plans.”

Transportation Costs Rising Significantly

Tom Prasky, head of delivery, Americas, Unispace, tells GlobeSt.com that he expects labor costs to continue to rise in Q4 2022 before finding an equilibrium in 2023 and 2024.

This is based on his company’s construction cost movement indices that track costs of labor, materials, and overhead costs year-on-year.

“One of the biggest contributors to the rise in construction costs has been the increase in transportation costs,” Prasky said.

“Driver wages, shipping, fuel, equipment, maintenance, and insurance coverage tend to go up each year, but the continual effects of COVID-19 have resulted in the highest constant peak in increased logistics costs ever.”

He said that materials have also played a significant role in rising construction costs, with building materials prices up 19.2% year-over-year and have risen 35.6% since the start of the pandemic.

“The construction labor shortage has resulted in higher wages, as construction firms have had to significantly raise pay to attract, retain, and bring back their workers,” Prasky said.

Prasky said that average construction hourly earnings, primarily for craft workers, rose 6.2% from March 2021 to February 2022, “and it is evident that pay raises will need to continue in the coming months to remain competitive.

“The US is currently one of the top five most expensive countries in the world to build due to labor shortages, supply chain disruption, and material escalation on a global level.

“Clients are feeling this impact and construction companies need to work closely with partners to navigate early release packages, repurchase opportunities, and deeper supply chain outreach amongst other mitigation strategies. This will be the norm going forward in the face of more uncertainty with transportation, labor, and material trends.”