Non-Residential Construction Outlook is Mixed as Costs Flatten But Tighter Lending Requirements and Higher Rates Challenge Starts
The overall outlook for non-residential construction remains mixed as the industry grapples with high interest rates even as costs flatten. Material availability and lead times, specifically, have mostly stabilized, bringing some alleviation to inflation after successive quarters of cost increases brought on by the global supply chain crisis and the COVID-19 pandemic.
Nationally, nonresidential construction costs tracked by the Mortenson Quarterly Cost Index remained almost flat for the 3rd Quarter 2023, increasing by only 0.19% despite continued pressure on labor availability in most markets. The increase is the smallest since pre-pandemic business conditions, andcould signal opportunity for building on a market-to-market basis.
Indeed, Mortenson regional offices reporting cost increases this quarter likewise saw below average cost gains, including nearly flat increases in Minneapolis (+0.3%), Milwaukee (+0.07%), Seattle (+0.02%), Portland (+0.25%), Chicago (+0.5%) and Phoenix (+0.67%), with the Denver office showing a decrease this quarter of almost half a percentage point (0.47%).
Both the Phoenix and Portland markets saw flatter material costs offset by labor rates. In Phoenix, strong construction activity continues to drive labor shortages and higher labor costs, while Portland saw pre-negotiated labor rate increases for the quarter.
Nationally, labor costs increased by only 0.1% after many collective bargaining agreements increased labor costs last quarter. The cost for subcontract work edged slightly upward at 0.9%, representing a significant slowdown in the velocity of cost increases that had previously stifled broader improvements in material costs. Comparatively, the overall pace of labor cost increases in the 2nd Quarter 2023 were still clocking in at 3.2%, and subcontract costs were tracking at +1.3%.
CONSTRUCTION COST INDEX
The Mortenson Cost Index is showing a single quarter increase of 0.2% nationally and 0.5% in Chicago. Over the last twelve months, costs increased 2.3% nationally and 3.6% in Chicago.
Building construction employment in the Chicago metro totaled 32,700 in September 2023. This is a 9% increase (2,800 workers) compared to September 2022. The cost and availability of qualified workers remains an ongoing challenge for the industry.
Source: Bureau of Labor Statistics
MATERIAL PRICING CHANGES
Prices for commodity-based materials have leveled off, with material availability and lead times reported to be mostly stable.
About this report: Mortenson tracks and reports on seven metropolitan areas in the U.S. including Chicago, Denver, Milwaukee, Minneapolis, Phoenix, Portland, and Seattle. The Mortenson Construction Cost Index is calculated quarterly by pricing representative non-residential construction projects in various metropolitan areas. It is part of a portfolio of industry insights and market studies provided by Mortenson.