Industrial Construction Costs Have Decelerated But Upward Pressure Looms

Industrial construction costs increased 2.6% year-over-year in March, marking a deceleration in the pace of increase that was at double digits 2 years ago thanks to supply chain constraints and inflationary pressures. However, high inflation, rising land prices and a tight labor market could cause construction costs to climb.

Pricing for small projects averaged $142 per square foot, up 17 percent from last year, while medium-sized projects averaged $85 per square foot, up 2.1 percent year over year, according to Cushman & Wakefield’s latest industrial cost guide. Pricing for large projects receded slightly to $75 per square foot, down 4.2 percent from last year. Miami was one of the priciest markets for industrial construction in the United States while Dallas and Houston were among the most cost-effective, according to Cushman & Wakefield.

Commodity prices continue to moderate this year, with lumber prices falling 1.4%, steel prices falling 8.4% and copper prices falling 2.9% year over year. Concrete prices rose 7.4% primarily due to plant closures in Mexico, the report said. Prices for all four commodities edged slightly higher month to month, although most increases are within the 10-year average. Cushman & Wakefield forecasts modest increases in commodity pricing through the end of the year.

In addition, labor costs are likely to increase as companies compete with each other to attract talent. Both skilled and common labor costs have recently risen at a higher pace than their 10-year averages, according to the guide.

Stronger–than-normal demand for warehouses in 2021 and 2022 resulted in new warehouse construction price increases of 45%, which was significantly higher than the five-year average of 3.2% between 2015 and 2019. Recently, though, lower demand has decreased the new warehouse construction pipeline, resulting in a leveling out of price increases. As of March 2024, new warehouse construction prices have decreased 1% year over year.

Demand for industrial space in the U.S. was strongest over the past 3 years with more absorption noted from 2021 through 2023 than any other three-year period. A total of 1.3 million square feet was absorbed in the U.S. during that period, followed by a notable deceleration in absorption in 2023, which carried over into the first quarter of 2024 with only 14 million square feet absorbed. That was the lowest quarterly level in more than a decade, according to the report.

Cushman & Wakefield’s cost estimates are based on a build-to-suit project of a modern-day distribution center totalling 109,200, 476,400 and 901,000 rentable square feet, excluding furniture, fixtures and equipment (FF&E); IT, audio/visual and security costs for the office component; soft costs or purchase of land for the overall industrial project; and racking or conveying.