Construction The change in construction costs was most evident in Austin.

AUSTIN, TX—Due in large part to labor supply and demand dynamics that first surfaced during the recession and have yet to resolve, overall construction costs continue to rise nationwide, according to a new report from CBRE Group Inc. This is despite the global collapse of commodity prices, including many key inputs to construction.

In January 2016, average total construction costs in the US registered a year-over-year increase of 1.8%, according to the RSMeans Construction Cost Index (CCI). Since January 2011, the national CCI has increased by an annual average of 2.3%, resulting in a cumulative 11.8% increase during that period.

For most markets, annual construction cost inflation accelerated in January 2016, following limited growth in 2015. An exception to the trend is Austin, where costs were flat in 2016, yet very strong growth during the four preceding years had Austin significantly outpacing other markets in cumulative terms, with a CCI change of 17.4% since January 2011.

While the US Producer Price Index has showed dramatic price drops for many key construction materials including asphalt and diesel, along with iron and steel products, the overall price of construction materials has not fallen. The decline in some materials has been offset by increases in other construction products (glass and cement, as well as construction sand, gravel and stone). In addition, local materials prices tend to be sticky–supply-chain issues, contract requirements, project timelines and other factors cause price changes to lag broader trends.

“The price of materials is just one driver of overall construction costs. The cost of construction labor tends to be much more variable across geographies and over time, so it typically has a larger impact on overall cost trends,” said Andrea Cross, Americas head of office research, CBRE. “The collapse of the housing market and subsequent recession affected supply-side dynamics for new construction throughout the country, as a substantial number of construction workers left the industry during the downturn and never returned.”

Nationwide, the number of workers employed in construction-related occupations declined by nearly 985,000, or 15.8%, between 2005 and 2015, according to the most recent occupational employment statistics survey from the Bureau of Labor Statistics. As a consequence, many markets have faced considerable labor shortages as new construction has picked up during the current economic cycle.

“When the number of new construction jobs began to grow without a proportional increase in qualified construction workers, tighter labor markets conditions pushed wages upward,” Cross added. “The effect was compounded by increased fees from contractors, who charged more not just because they could now afford to be more selective, but also because they were stretched across a larger number of projects and would need to use less-experienced crews for some projects—allocating to those projects more man-hours than would be necessary with the best crews.”

While total construction costs have registered strong increases during the current economic cycle, appreciation has been significantly slower than in the previous cycle. Between January 2004 and January 2009, the national CCI increased by an average of 6.6% per year for a cumulative gain of 37.4%—more than three times the cumulative 11.8% increase from 2011 to 2015.

Cross tells “Counter to the national trend, employment in the construction occupations increased in Austin, Dallas/Fort Worth and Houston between 2005 and 2015. These markets had relatively minor housing market corrections compared with metros such as Phoenix and Los Angeles, which had the largest decreases in construction employment among those studied in our report. Also, the Texas economy rebounded rapidly following the recession, driving demand for and development of both residential and commercial property in these markets. Construction costs tend to be lower in markets with fewer barriers to entry, such as relatively abundant land and fewer restrictions on development activity. Also, factors such as the local cost of living, minimum wage requirements and union representation affect the wages demand by construction workers. Due to these factors, wages are relatively low in markets such as Dallas/Fort Worth, Austin, Houston and Phoenix compared with New York and San Francisco, the most expensive construction labor markets examined in the report.”