Growth in Chi. Construction Costs Edges Up

CHICAGO—Overall construction costs Chicago metropolitan area will increase by about 4.5% during 2015, according to the Mortenson Construction Index, a quarterly study published by Mortenson Construction Co., a family-owned firm. This pace is somewhat quicker than was expected at the start of the year when Mortenson predicted that overall Chicago costs would increase by 4.0%.

“Construction cost increases in Chicago generally trend higher in the 2^nd quarter as union wage and benefit increases take place on June 1^stof each year,” Dennis McGreal, chief estimator for Mortenson's Chicago office, tells GlobeSt.com. “Chicago commercial construction is having its busiest year since the recession began in 2008. There has been a gradual increase in the prices of some commodities and as subcontractors get busier, they are able to raise prices.”

The company calculates the index quarterly by pricing representative non-residential construction projects in various metropolitan areas, he adds. The representative model and inputs remain the same quarter to quarter. The index includes over 70 inputs comprising material, labor and equipment components included in most non-residential building projects.

For the past five quarters, the growth in Chicago costs largely mirrored the rise in average costs nationwide, but recently began edging ahead a bit. In the second quarter, Chicago prices were 4.4% higher than last year at this time, Mortenson finds. And since January 2009, Chicago prices have increased by about 16% while prices increased by about 13% on a national basis. But the increases are still lower than on the coasts or in Texas.

Costs in other cities are rising at the same rate or a bit lower than Mortenson had estimated at the start of 2015. For instance, Phoenix construction costs will rise just 2% in 2015 vs. the 3% predicted earlier in the year. Denver and Seattle cost increases are holding steady at the expected 4% and 5-6% estimates, respectively, while Milwaukee and Minneapolis cost increases will be a bit lower, at 5% compared to the earlier estimate of 6%.

“The Chicago labor market for construction has not experienced the labor shortages experienced in other areas of the country that have higher growth rates,” says McGreal. “The market has recovered to the point where there is limited capacity to support higher rates of growth. There is a backlog of work in the subcontractor base because so many skilled workers left the industry when projects declined down during the recession. Longer term the aging of the construction labor force is a concern across the country.”

According to the company's report, for Chicago “all components of the index either increased or remained flat from last quarter.” Gypsum board costs grew by 6.1% from one year ago, and finish carpentry increased by 4.3%. Most other components experienced slighter growth. “The largest components of the overall index, HVAC and Electrical Systems, grew 2.5% and 2.0% growth, respectively.”

“The overall cost index continues its steady rate of increases while construction employment growth has slowed,” the company reports. “The overall rate of growth should continue in the near term as market activity continues to increase. We recommend building owners anticipate cost increases based on a 4.5% annual rate for the balance of 2015.”