Construction costs, which have been on the rise for years, were slated for another increase this year. But there was good news: cost growth was expected to be at a slower pace than previous years, according to the JLL 2020 Construction Outlook. Unfortunately there is also bad news: the coronavirus has just added an element of uncertainty to projections about construction costs.
Leaving the coronavirus aside, JLL estimated that that total construction cost inflation would be in the range of 1 to 3%, with material and labor costs both expected to grow moderately as well for this year. Labor costs are expected to rise by 2 to 4%, and material costs to change at a slightly slower pace, in the range of -1 to 4%.
However in recent weeks, the coronavirus has upended supply chains around the world and its effect on construction costs in the US is still developing, JLL said.
“The impact of the virus is impossible to predict with certainty, but any prolonged slowdown in Chinese or global economic and manufacturing activity is likely to have significant ramifications for construction costs,” JLL said.
As a very broad estimate, roughly between one-quarter and one-third of all construction products in the US are sourced from China, so any sustained slowdown in Chinese production may cause material shortages in the US and could lead to increased costs for construction materials, it said.
There is another scenario to consider, though. Reduced construction activity due to virus containment efforts causes a major reduction in demand for materials from China, the US or other countries and this reduction in demand offsets or outweighs the upward price pressure. “Without the ability to accurately forecast the impact of the virus, we have widened our materials price forecast to account for the uncertainty,” JLL said.
The coronavirus could also threaten economic growth, further clouding projections aboud construction costs. Already, even without the impact of the novel virus, GDP growth in 2020 was forecast to be in the 1 to 2% range, down from 2.3% growth in 2019. In particular business investment, namely investment in structures, is expected to stall in 2020, JLL said. “The overall US economy is expected to remain strong enough in 2020 to keep the construction industry on track overall, but will not provide the private investment fuel that would be necessary for strong growth.”