Are Construction, Labor Costs Slowing Commercial Real Estate?

By now, pretty much everyone knows there’s a lot going on in the world of construction, including unpredictable commodity prices and increased construction and labor costs. Turner & Townsend recently released its yearly “International Construction Market Survey,” taking a deep dive into the global trends that are having the most influence on the current pace of real estate development. Unsurprisingly, the report shows big changes over the previous year but also shines a light on issues that can be addressed now to help improve the pace of commercial real estate construction in the future.

2021’s key construction challenges

Anyone who has been in or around the construction industry since the Great Recession can tell you that there aren’t enough bodies to fill too many jobs. This has been a very consistent problem because many chose to retire or find other types of employment rather than waiting on the economy to recover. Those people have simply never returned or been adequately replaced, leaving a huge, gaping wound in the sector.

This year was no different. Where a shortage of skilled labor was the No. 1 key construction challenge for 2020, it came in at No. 2 this year, simply because “COVID-19” was added as a category. Of course, COVID-19 is going to be No. 1 in a period when the entire global economy is constantly on edge, waiting for the next wave of disease to break out.

Rising construction costs have also moved way up the list of concerns since 2020, jumping from 12th place all the way to sixth place in these few months. Excessive lead times also made an impressive leap to the fifth most influential challenge in construction this year.

Despite these challenges, the report explains that:

Skilled labor shortages continue due to ongoing pandemic

One of the most impactful influences to the speed of construction is the availability of labor, as you might expect. Due to border crossings being periodically closed, as well as a hesitation for construction labor to enter neighboring countries to fill gaps in labor during the pandemic, many countries are forced to work with the limited labor pool available within their own boundaries.

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A full 64.4% of markets surveyed expressed concern over skills shortages, with only 25.6% saying their labor force was in balance. A few markets (10%), located primarily in Africa and South America, indicated a surplus of labor.

Group 1 Tradesmen, which includes licensed professionals like plumbers and electricians, were in the most demand across the United Kingdom, Australia, New Zealand, North America, and Europe. In contrast, the Middle East, South America, and Asia reported a higher shortage of general laborers.

Both of these types of labor shortages create massive problems for construction completion, but the lack of Group 1 Tradesmen may represent a much more significant problem, since general laborers can readily be trained on the job and often in a few weeks, depending on the labor being performed.

Group 1 Tradesmen, on the other hand, require years of training, apprenticeship, and various certifications to legally perform their jobs. A shortage of this kind of labor absolutely will drive up labor costs (and slow down projects), often significantly, potentially pricing smaller projects out of the market entirely.

Supply chain woes continue to drive materials prices

No building is a building without the materials that go into it. So when the supply chain isn’t able to supply all the structures necessary for construction, it creates a serious bottleneck. Not only is construction slowed due to a simple lack of supplies, but sometimes due to the increased costs associated with a lack of supply.

The report pointed to reduced supply chain capacity due to COVID-19 restrictions, rising demand as construction projects that were halted in 2020 resume, and shipping delays caused by both competition with e-commerce orders and a shortage of shipping containers to move materials between markets.

While some clients and markets are responding by changing their supply chain strategies, significant challenges remain and will continue to ripple due to pandemic mandates like social distancing in manufacturing facilities.

The Millionacres bottom line

Although construction and labor costs are absolutely a factor in slowing down production of new commercial real estate units, the picture is far more complicated than that. Even with an unlimited budget, in many regions there are simply not enough materials, workers, or productive hours (given COVID-related safety restrictions) to build like we’ve become accustomed to. In addition, for those projects in the United States, for example, widespread infrastructure programs are likely to increase the burden on the construction industry and materials manufacturers.

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Expect commercial construction to remain at a slower pace than usual, because there’s only so much anyone can do with so many bind points in their processes. As we find safer ways for construction crews to work, manufacturing facilities to produce materials, and logistics companies to move more products, the tension should ease, but it may be several years before the construction industry has what it needs to build more units faster.

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