The cost of construction continues to rise. Across North America, construction costs are up 5% to 11% from a year ago, according to a new quarterly report from real estate and construction consulting firm Rider Levett Bucknall. This continues a steady rise in costs seen every quarter for the past five years.
The impact of this trend is that it is becoming more and more expensive to build houses and office buildings. Rising costs could very well signal an impending recession, which will likely lead many developers to stall or even cancel major projects.
“Construction has historically been a cyclical industry that reacts to the overall pace of the broader economy,” said Julian Anderson, president of RLB North America. fast company by email. “When the economy is hot and there is a lot of investment, construction is busy. When the economy is in recession, the construction industry will slow down.
A rapid rise in costs, says Anderson, “usually portends the end of a bull cycle.”
The recent cost increase can be attributed to a number of factors, such as supply chain issues for raw materials and construction products, labor shortages, rising fuel prices, inflation and the wider impacts of the pandemic.
These costs occur in each of RLB’s equity indices, including 12 in the United States and two in Canada. But these issues don’t strike evenly, with parts of North America seeing much larger increases.
In the United States, costs increased the most in the Seattle area, where there was an 11.28% increase from April 2021. Chicago, Boston, New York and Denver all saw their construction costs increase by 8% or more over last year. In Toronto, costs increased by more than 14% over last year. The slowest rate of cost increase was seen in Honolulu, although costs there are still up more than 4.5% from last year.
One of the main areas where costs are rising is housing, which Anderson says can prompt homebuilders big and small to cut spending. “When rising construction costs outpace increases in sale price or rental yields, projects are delayed or cancelled,” he says.
But rising construction costs alone cannot be blamed for what may be a slowdown in demand in the housing market. Anderson also points to rising cost-of-living expenses and rising interest rates, which experts say are worsening the current housing crisis.
“While the cost of construction is a big factor,” Anderson says, “I see rising interest rates as a bigger challenge.”