Introduction

Estimating construction costs amid uncertainty

Midway through 2022, the U.S. construction industry continues to grapple with numerous challenges, including labor shortages, supply chain disruptions and higher materials costs—all exacerbated by the Russia-Ukraine war, shifting trade policy, rising interest rates and pandemic-related restrictions.

The construction industry thrives on predictability, and periods of uncertainty and volatility make estimating and managing costs more difficult. Not only was COVID-19 an unforeseeable black swan event, but the resulting market impacts over the past two years have altered many of the typical approaches used to control costs. The result: unprecedented spikes in construction costs.

This report dissects the underlying components of total construction costs—labor, materials and margins— and identifies the factors driving higher costs. The analysis delves into construction activity trends, supply chain disruptions, labor shortages and cost escalations in materials. We discuss these trends in the context of major third-party cost indices and present a new proprietary CBRE Construction Cost Index that forecasts costs through 2024. The primary takeaway: 2022 is likely to see more abnormally high increases in average construction costs, with the CBRE Construction Cost Index rising 14.1% year-over-year by the end of 2022, but increases thereafter should moderate.

By better understanding the levers moving construction costs, we hope industry participants will be better positioned to navigate this challenging environment.

Pandemic impacts ripple through construction cost chain

COVID-19 precipitated shortages, delays and cost increases that continue to reverberate through the global economy in 2022.

The construction industry has been among the most affected, given the on-site nature of the work (public health restrictions or waves of illness across crews can hamper productivity), the large quantities and wide variety of both materials and labor required, and the vulnerability of several key inputs to tariffs, quotas and geopolitical tensions.

Pent-up demand for construction projects in the aftermath of the initial pandemic lockdowns—particularly residential, as many people spent more time at home—drove an uptick in construction activity. However, the construction industry, like manufacturing, distribution and other sectors, was understaffed amid COVID-related layoffs, quits, illnesses and deaths.

The result: a perfect storm of interconnected factors that pressured costs. Figure 1 illustrates the interconnected set of challenges impacting the industry, how each challenge effects certain costs and how those impacts indirectly drive up costs for other factors.

Figure 1: Pandemic impacts on interconnected cost drivers

Source: CBRE Strategic Investment Consulting, April 2022.

Construction costs are the sum of three main components

This report examines the key trends impacting the primary drivers of total construction costs: materials, labor and margins.

Shifts in prices for any one component do not translate one-to-one into the final cost. Materials generally represent the largest share of total cost, followed by labor and margins, but the weight of each component can vary significantly based on a project’s location, property type, timeline and other factors.

Figure 2: Construction cost drivers and outlook

Source: CBRE Strategic Investment Consulting, April 2022.

New CBRE index indicates that cost escalation will increase in 2022, moderate in 2023 and 2024

This index incorporates the three key cost components to provide a comprehensive view of construction costs that can also be statistically modeled to estimate future escalation.

The index increased 11.5% in 2021, markedly above the 2%-4% historical trend. Although we expect improvement in supply disruptions and broader inflation in late 2022, the significant price increases already seen year-to-date are unlikely to reverse, and further cost pressures will remain. As a result, construction costs are expected to rise 14.1% by year-end 2022 before stabilizing to around 4% in 2023 and around 3% in 2024.

These projections assume that margins account for a significant share of total construction costs and that construction demand will remain robust through 2024. If weaker-than-expected economic growth causes construction activity to slow significantly, we would expect cost increases in 2022 to be roughly on par with 2021 and then fall quickly to the mid-2% range in 2023 and the mid-1% range in 2024.

Section 06 provides more detail on the CBRE Index’s historical performance and presents our projections within the context of other industry benchmarks.

Figure 3: CBRE Construction Cost Index, recent trend and forecast

Note: Index is benchmarked to 100 at Q4 2019, the last full quarter before the onset of COVID-19.
Source: CBRE Econometric Advisors, CBRE Strategic Investment Consulting, April 2022.