One of commercial real estate’s ongoing difficulties looks like it will continue to challenge the industry over the next year, according to what I heard at the recent RE Journals’ Commercial Real Estate Forecast Conference, in Downtown Chicago. Construction-material costs and labor availability, one of the industry’s few, but major, sticking points, should continue to be a problem in the coming year, said panelists.
The situation is expected to improve a little: It’s estimated that construction costs rose somewhere between five and seven percent last year and there is a three-to-five-percent jump forecast for 2019. Among the culprits is a rise in steel and lumber prices, along with the difficulty of rising wages and finding skilled workers attracted to the construction industry quickly enough to meet development demand.
The labor shortage, in particular, has caused commercial real estate projects to stall across the country, with projects in some areas falling behind schedule by six months.
Due to a tight labor market, nearly every industry is facing a labor shortage along with wage increases, and commercial real estate is no different. The inability to find workers to complete in-demand projects costs money because of the delays involved getting these projects out of the ground, not to mention higher payrolls. Industry observers have also pointed out that since there are more employment options available many workers, who didn’t aspire to stay in construction for the rest of their lives in the first place, are changing careers. Additionally, it is tough to find young talent interested in construction jobs, and the training curve is costly for these positions.
On the materials end, the trade war with China is not helping. Turner Construction Co.’s recent cost index found that expenses increased 5.38 percent over the fourth quarter from the same period a year ago. It found that, though the costs of aluminum and steel haven’t risen dramatically over the last few months, there have been steady cost increases in gypsum.
As of now, there is no way to predict how long tariff battles and the increasing costs of materials will last, but there is one thing we do know. Those higher costs will likely be passed on to tenants in the form of higher rents.
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