CRE N Illinois

How concerning are mounting construction costs?

How concerning are mounting construction costs?,ph1

The bottom fell out of a lot of things following the 2008 market crash, including construction costs. Prices associated with nonresidential construction tapered off until about six years ago, when steady escalations took hold year after year. Will these increases hasten the finale of this record-long development cycle?

When it comes to construction costs, there are two considerations, materials and labor. Over the past fifty years, the cost of materials has risen at a relatively constant 3 to 5 percent rate. Comparing smaller time frames—such as the handful of post-recession years versus the booming economy since—it would appear that material costs have risen at a faster-than-typical rate.

However, any additional pricing in our recent history is more of a regression to the mean than an omen. Again, costs tumbled following the recession but the economy (and hence development, construction and construction prices) rebounded since.

“The escalation we have seen is no different than what people consider an anomaly in other years,” said Andy MacGregor, president of Accend Construction. “None of this is any scarier than what we have dealt with in the past. I feel like people just like to whine about it.”

While the market sat on pent-up price surges that didn’t unspool until the economy really hit its stride around 2013, there is another factor: tariffs. The Trump administration has waged an on-again, off-again trade war with numerous countries, especially China, that in theory should jack up the prices for metals and other materials used in commercial construction. But here, too, anxiety may be misplaced.

“I think it’s more the uncertainty of the tariffs that gets people going,” said MacGregor. “To the extent that there have been higher prices, it has had more of an effect on manufactured goods than raw steel. I haven’t heard a ton about it on the building side, to be honest.”

In the broader view, any rise in material costs from the trade wars will likely be a temporary blip, akin to the rise in gypsum products immediately following hurricane Katrina.

The other factor that affects construction costs is labor. According to MacGregor, Chicago has experienced fairly stable labor costs, at least on the union side. Illinois’ unemployment rate dropped to 3.8 percent in November 2019, the lowest in more than 40 years, according to the U.S. Bureau of Labor Statistics. This includes added construction jobs in nine of the state’s 14 largest markets.

Illinois is a complex situation, however, as the state lost population for the sixth straight year, shedding more than 50,000 residents in 2019 alone. Fewer people are moving to—and some are outright leaving—the state, citing factors such as high taxes and distrust of state and local government. This has amounted to a population loss of nearly 160,000 people in the 2010s, or about 1.2 percent of the state’s overall population.

Fewer people means fewer workers, which means higher labor costs. That may soon change, however. Compared to large markets along the coasts, Chicago remains exceptionally cost competitive. It’s cheaper to live and to build here than in New York, San Francisco, Seattle or L.A.

Accend’s parent company, Skyline Construction, is based in the Bay Area—giving them a front-row view of tech firms emigrating from Silicon Valley to cheaper, but still dense, metros like Chicago. The attraction of affordable real estate, a lower cost of living and a steady supply of well-educated, Big 10 alumni are all reasons that Salesforce, Facebook, Google and others have committed to expanding their footprints in Chicago.

“When I started working in the Bay Area about 10 years ago, construction costs there were pretty much equal to Chicago and the labor rates are still identical today,” MacGregor said. “What’s happened since is that in San Francisco it’s now 30 to 40 percent more expensive to build commercial office space. On top of that you have a cost of living that’s about 60 percent more.”

Chicago’s dense, globally focused market offers good transportation, low cost of living and a robust labor pool. Corporations and employees alike can’t ignore those metrics.