Construction Prices Stabilize as New Supply Revs Up

New supply can radically shift the market equilibrium and dramatically impact the performance of existing assets, according to a new video from Marcus & Millichap.

Generally speaking, construction costs surged during the pandemic as supply chains broke down, said John Chang, National Director Research and Advisory Services, Marcus & Millichap.

But prices generally stabilized in 2023, and they’ve been relatively consistent for about a year. Overall, they’re about 26% higher than they were in 2019.

Lumber costs are running about 16% higher than before the pandemic.

Steel prices are about 65% higher, while aluminum now stands about 52% higher than its average price from 2019.

Concrete costs have been rising at a slow but steady pace and are about 39% higher than in 2019.

Construction labor costs, which now stand about 21% higher than their 2019 levels.

Interest rates on construction financing currently are in the 8% to 10% range, which is up from 2019 when it was in the 5% to 6% range, according to Marcus & Millichap.

“Depending on the property type, location, financing used, etc., construction costs are up by approximately 25% to 50% compared to where they were prior to the pandemic,” Chang said.

As for new supply trends for office, Marcus & Millichap is expecting about 67 million square feet of new office to come online in 2024, which seems like a lot, considering that office vacancy rates are forecast to reach an all-time high of 17.8%, Chang said. Construction is roughly half the level seen in the early 2000s, and the majority of the pipeline is build-to-suit mostly in the suburban areas, according to Marcus & Millichap.

Retail’s construction pipeline only has about 40 million square feet coming online in 2024, Chang said.

“That’s about 75% below the construction pace of the early 2000s, and about 70% of the expected completions will be single-tenant retail properties,” he said.

“Retail construction has been down significantly since the global financial crisis, and that’s part of why the retail sector’s outperforming with a forecast vacancy rate of 4.8% in 2024. That’s just a bit above the 4.6% record low of the third quarter last year.”

At the other end of the construction pipeline spectrum, with record or near-record deliveries, are industrial and multifamily.

Marcus & Millichap anticipates the completion of about 360 million square feet of industrial space in 2024, which is coming off the addition of about 400 million square feet in both 2022 and in 2023.

For about eight years straight, developers have been growing the inventory of industrial space by about 2% per year, he said.

“Industrial vacancy rates increased by a significant 170 basis points in 2023, and we expect the vacancy rate to rise by another 80 basis points to 6.1% in 2024, about on par with where we were at the end of 2014,” according to Chang.

Meanwhile, apartment construction is expected to set a record in 2024 with the addition of 480,000 new units, an inventory increase of about 2.5%.

“We expect those completions to bump the vacancy rate up by 30 basis points to 6.1%, which suggests a very solid level of net absorption this year; about 390,000 units, one of the better years on record,” Chang said.

Keep in mind, Chang said, the US still faces a housing shortage on a macro level, somewhere around 3 million housing units and the cost of home ownership is out of the reach of most. “Only about 25% of US households could qualify for a Freddie Mac mortgage on a median-priced home, even if they had the needed down payment,” he said.

Furthermore, the affordability gap between the average monthly rent and the monthly house payment on a median-priced home is about $1,300 per month; an all-time high.

“So, while the huge wave of apartment construction is needed, I think the completions will outpace absorption in 2024,” Chang said.

That said, the apartment construction pipeline thins pretty significantly in 2025 and beyond, suggesting that demand will once again outpace new supply within the next couple of years, Chang said.