Non-Residential Construction Outlook in Seattle Remains Stable as Costs Flatten and Activity Remains Steady Despite Tighter Lending Requirements
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.
In Seattle, nonresidential costs remained essentially flat in the 3rd Quarter 2023, edging up a scant 0.02%. That matches steady construction activity in the region as reflected by the Rider LevettBucknall RLB Crane Index, which tracks the number of fixed cranes on construction sites in 14 cities as a simplified measure of the current pipeline of construction. An increase in cranes on commercial projects lands the total 3rd Quarter crane count in the Seattle area to 45, with a slight increase in the Capitol Hill area. Of the 45 cranes counted by RLB, 36 are newly erected since the last count six months ago.
Nationally, nonresidential construction costs tracked by the Mortenson Quarterly Cost Index likewise remained basically 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 lower than average cost gains, including nearly flat increases in Minneapolis (+0.3%), Milwaukee (+0.07%), 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 3rd Quarter material cost flattening mitigated 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%, while 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
(JANUARY 2009 = 100)
The Mortenson Cost Index is showing a single quarter increase of 0.3% and flat in Seattle. Over the last twelve months, costs increased 2.3% nationally and 2.7% in Seattle.
CONSTRUCTION EMPLOYMENT
(12-month change)
Construction employment in the Seattle metro region totaled 30,200 in September 2023. This is a 1% increase (400 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
(Cumulative Q3 2021 to Q3 2023)
Prices for commodity-based materials have leveled off, with material availability and lead times reported to be mostly stable.
Insights:
Despite cost flattening, industry optimism remains cautious to tepid, particularly as a decline in non-building construction activity is dragging construction starts down overall. Citing increased credit rates and tighter lending standards overall, the Dodge Construction Network reported a 6% drop to construction starts in September, and noted that starts for the year have remained flat relative to 2022.
The AIA/Deltek Architecture Billing Index, often viewed as a nine-to-twelve month forward-looking indicator of construction activity, likewise dipped into negative territory in September, led by declines in multifamily and billings in the Western portion of the US, with AIA Chief Economist Kermit Baker noting that the decrease in billings shows a hesitancy among clients to commit to new projects.
Ironically, the lull in construction activity could prove beneficial to well capitalized projects already in design or preconstruction, especially if future market conditions provide better access to labor as costs overall remain flat. Even as nonresidential building starts tracked by the Dodge Construction Network dipped 4% in September, starts were still 3% higher than in September 2022, and the sector remains healthy with a seasonally adjusted annual rate of $459 billion.
Our construction cost index shows a near flattening of material, labor, and subcontractor costs for the 3rd Quarter 2023 and an overall slowdown to the trajectory of cost increases seen since the onset of the pandemic. Based on market data and our insights, we remain cautiously optimistic while keeping a watchful eye on labor availability even as costs mitigate, especially in markets where mega projects aren’t already consuming labor resources. We recommend customers weigh the relative challenges and cost of borrowing capital against flattening costs on a market-to-market, opportunistic basis for the balance of 2023.
For a more specific update or questions regarding this report, please contact:
Vern Jones
Chief Estimator
vern.jones@mortenson.com
425.497.7152
Bryan Maggio
Director of Business Development
bryan.maggio@mortenson.com
425.497.6669
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.