Fighting Inflation Pressures
December 8, 2022 3 Minute Read
CBRE’s Life Sciences (LS) Sector recently hosted a FOCUS Forum, a virtual event where experts from CBRE and client organizations shared cost saving strategies and best practices amid rampant inflation. Panelists addressed topics such as construction costs, operational changes, wage increases, supply chain issues and capital reallocation.
Trends in Project Management
John Carde, CBRE Senior Managing Director of LS Project Management, addressed trends in construction employment and wage rates. Labor costs continue to increase as both construction and private-industry employment costs rose throughout 2022. A tight labor market and higher hourly wages, which have increased more than 4.7% over the past two quarters, have exacerbated the difficulty of hiring contractors, project managers and vendors. Labor costs will be a challenge for the foreseeable future due to inflation and staffing demands.
Construction material costs are also higher than last year, amid signs of potential softening. Engineering News-Record reports that the cost index average rose year over year for construction materials (including steel, lumber, fuel, cement and other commodities) but fell 14.9% from May to September 2022. Strained manufacturing conditions, reduced supplies and lead-time issues are keeping construction material costs elevated from 2021. The Producer Price Index (PPI) for net inputs to construction industries and goods remains 17.4% higher than last year, but has slowed month-to-month by 1.8% since June 2022. This recent slowdown indicates a potential cooling in overall construction material costs. For more information, see CBRE’s 2022 U.S. Construction Cost Trends Report and Q3 U.S. Construction Market Trends Report.
Live polling data from the event indicated a 50/50 split between clients wanting to move ahead with or delay capital project prioritization.
Key takeaways include:
- Labor wages are expected to continue to climb for the foreseeable future.
- Although some projects can take years to finish, a labor pool shortage is causing scheduling delays.
- Alternate procurement strategies are essential, including awarding projects more quickly so materials can be ordered earlier in the timeline to secure better rates
Cost Pressures and Trends
Matt Kinnaird, CBRE Managing Director, Platform Sourcing Solutions, shared insights on inflation and service-line increases, focusing on almost double-digit increases in the annual Consumer Price Index (CPI) in August across the U.S., U.K. and Germany. He discussed inflation estimates across food, janitorial, security, HVAC/electrical services, water treatment and pest control due to wage increases, which can drastically increase the budget for these roles.
Live polling data from the event indicated that our Life Sciences clients have seen the greatest increases across energy, janitorial, labor and cafeteria costs. COVID made some people reassess their career choices, making it harder to hire in specific areas, especially in lower-paying roles. Adjusting the budget to fill these roles can quickly increase the salary.
The event’s live polling data identified cost cutting, energy hedging and delaying decisions as the top organizational strategies used to mitigate cost pressures. Results also indicated that clients are reducing inventory, finding new suppliers, using government frameworks, creating efficiency improvements and reviewing and reducing scope. Other mitigating factors include extending contracts further to get reductions and taking advantage of contracts already in place with fixed pricing.
Jonathan Dewar, CBRE Senior Director of Advisory & Transactions Consulting, highlighted four key trends affecting portfolio transformation, leadership and talent, partnerships and collaborations and geopolitical and economic uncertainty. Collectively, these factors, along with sustainability, influence portfolio changes and require a holistic, transformational approach.
The FOCUS Forum’s live polling data indicated that the rising costs of project delivery have not changed planned fit-out spend on new acquisitions or renewal transactions thus far. Clients indicated that return to work is the number one consideration affecting portfolio planning. Real estate leaders should offer different workspaces that enable choice and decision making so that employees have flexibility in how, when and where to work appropriately for their job. Focusing on the people who use the workplace is crucial in driving an organization’s vision around talent and workplace experience.