Upward Pressure on Construction Costs Reaches Record High
The highest figures since 2012, the index shows even more price pressure than any other time during the pandemic.
If you thought that upward pressure had already been terrible (it was), you might want to plan for the idea that it could get worse (it has).
This is according to the IHS Markit PEG Engineering and Construction Cost Index.
The ECCI “is a diffusion index based on data independently obtained and compiled by IHS Markit from procurement executives from leading engineering, procurement, and construction firms.” The executives come from the Procurement Executives Group, a professional association of people in engineering and construction procurement.
Costs rose for the seventeenth consecutive month in March, according to the groups, and the headline cost increased from February’s 75.3 to 85.5 in March, the highest level in the ten-year history of the index. Materials and equipment went from 75.6 to 88.2, while subcontractor labor increased from 74.5 to 79.3.
Expected pricing in six months was also up for both headline and materials and equipment. Subcontractor labor, on the other hand, fell from 88.8 in February to 79.1, suggesting an expectation of lower prices toward late third quarter.
All rising rates of change have been accelerating.
Rising for the nineteenth straight month were shipping costs. Whether from Asia or Europe, the index hit 90. Many metal prices were up, with structural steel from 70.8 in February to 79.2 in March. Carbon steel pipe hit 87.5, while transformers and electrical equipment were 100. Copper-based wire and cable went from 79.2 to 95.5. The Russian invasion of Ukraine seems a likely factor, as the massive destruction will require large supplies of materials to eventually rebuild.
Indexes aren’t the same as specific prices. The latest futures price for lumber, according to Nasdaq, is just over $1,000, for example. That’s down from vertiginous highs in August 2021, but still high.
These continuing trends are likely to prove painful. New construction costs are rising faster than developers and builders have any hope of prescience. Increased costs mean higher replacement and maintenance costs, potentially compressing cap rates even more than has been the case and driving rents up higher as a result at a time when inflation is already a problem for commercial and consumer tenants.