FM Cost Outlook

Though the rate of inflation is slowing, costs are expected to continue increasing through 2024

Year-over-year FM cost inflation in the U.S. fell to its lowest point in nearly two years through Q1 2023.

From Q1 2019-Q1 2023, the CBRE FM Cost Index climbed to 121.7, meaning FM costs have grown 21.7% in total during that period. The year-over-year rate of inflation peaked in Q1 2022 at 8.9% and has fallen to just over half that pace in early 2023. The rate of inflation is expected to bottom out at the start of 2024 before settling to a pre-pandemic pace of around 2.5% per year thereafter. By the end of 2024, the FM Cost Index is expected to reach 126.7 in the U.S., meaning costs will be 26.7% higher than they were at the start of 2019.

Figure 2: CBRE U.S. FM Cost Index and year-over-year % change

Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.

Contract cost inflation has been outpacing wage growth in recent quarters

Wage growth drove most of the cost inflation in 2020, but soaring input costs led to service providers pushing contract prices in 2021-2022.

The FM Cost Index is comprised of two main components—FM-related hourly wage levels and service-contract costs. Average FM-sector wages have been elevated since the beginning of the pandemic and haven’t shown consistent decline until the last few quarters. Private-sector competition for labor has been historically high since 2020 and FM-related sectors have been especially impacted, outpacing overall private-sector wage growth (see Figures 24 and 25). Wage pressures should ease as the economy slows and overall demand for labor reduces competition.

Contract cost inflation did not take hold until mid-2021 when more facilities began reopening and demand for services spiked. Service providers also began raising prices as their input costs increased (see Figures 18 and 19), meaning the price of goods, materials and other services they need to perform increased faster than the price they were charging to end users.

Cost inflation has slowed for both the wage and contract components, and both are expected to fall below the 2019 annual average in 2024. The key factors impacting contract and wage growth are covered in detail in sections 3 and 4.

Figure 3: Year-over-year % change in CBRE U.S. FM Cost Index by cost component

Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.
Note: Jan 2019=100.

Sustained competition for labor should keep hard services costs elevated, relative to soft services

Both hard and soft costs rose significantly in 2021 and 2022, but are expected to trend downward over the next two years.

Within the facilities management industry, both hard services and soft services are facing labor shortages and accompanying wage inflation, but the underlying dynamics differ for the two segments (see below). Early in the pandemic, soft services had more significant growth than hard services and the overall economy, likely a result of high pandemic-related demand for these services combined with a limited supply of labor. These jobs also have a low barrier to entry relative to hard services, meaning FM providers are competing with an array of other types of companies (e.g., warehousing, retail) for the same talent.

Hard services cost inflation has picked up dramatically in the past two years and is expected to remain high. Hard services sectors have had to compete heavily with the construction industry which has boomed since early 2021. Hard services sectors also tend to have more union positions, which were initially slow to respond to wage pressures, but have since seen more dramatic wage inflation as contracts are negotiated and executed (see Figure 26).

Looking ahead, soft services cost growth will continue to slow more quickly as the economy cools, while ongoing wage negotiations and high demand for hard services will keep inflation pressure elevated.

Hard Services
e.g., electric, plumbing, HVAC

• High barriers to entry. Specialized skill sets mean it takes a long time to train new workers
• Talent pipeline has plateaued.
• High degree of unionization. Baseline wages for union labor typically higher but less likely to inflate rapidly.
• Younger retirement age. Workers tend to leave the labor force earlier (and stay retired) due to greater access to pensions/retirement plans

Soft Services
e.g., security, janitorial, landscaping

• Low barriers to entry. Workers have not invested in a unique skill set, so there is less incentive to stay in a position
• High turnover. Jobs tend to be less gratifying and more injury-prone
• Competition. Other industries with low-barrier-to-entry positions can pull from this labor pool
• Lack of immigration. Slowdown in recent years has had an outsized impact on these industries

Figure 4: Average annual % increase in FM Cost Index, Hard Services and Soft Services

Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.

U.S. FM costs are expected to be higher in 2023 and 2024 in the South, where demand for services has increased

Differences in demand, labor and input costs can drive variation across U.S. regions.

In the Northeast, contract prices have been significantly higher than other regions from 2020-2022, which has driven up FM costs substantially in the region. Wage growth has had less impact in the Northeast, but has been a major factor in West and South markets, especially for soft services. Though electricity costs are not directly factored into the FM Cost Index, the Northeast had the highest jump in electricity rates since the onset of the pandemic (see Figure 11), which inevitably impacted FM service providers who passed on as much cost as they could to end consumers.

Strong demand for labor and services is expected to add pressure to both wages and contracts in the South. The other regions should have comparatively low FM cost inflation in 2023, but all are expected to converge around 2.5% annual growth in 2024 as conditions normalize.

Figure 5: Average annual % change in CBRE FM Cost Index by U.S. region

Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.
Methodology Notes: Historic U.S. regional variation is estimated by incorporating CPI (less shelter) to estimate contract cost differences and FM-related wage growth to estimate wage differences. Regional GDP-deflator (estimate of inflation) and wage growth forecasts from Oxford Economics are incorporated to forecast regional differentiation through 2024.

North American FM cost growth should return to the pre-pandemic norm in late 2023/early 2024

High inflation may linger in Mexico but should fall below the pre-pandemic average by late 2024.

FM inflation has trended similarly across North America since the onset of the pandemic, though Mexico has had higher inflation than the U.S. or Canada, in large part due to higher wage growth amid a very tight labor market. Mexico’s Minimum Wage National Commission added wage pressures in January 2023 when it increased the minimum wage by 20%. Since 2020, the minimum wage has more than doubled. As of Q1 2023, modeled estimates show that Mexico’s year-over-year FM wage inflation rate peaked at more than 11%, nearly triple the pace of growth in the U.S. and Canada. Labor demand is expected to ease as domestic and neighboring economies slow, which should bring wage growth closer in line with overall CPI growth.

Canada’s cost trajectory will look similar to the U.S. as the Bank of Canada (BoC) keeps interest rates elevated to bring down core-CPI inflation. Labor markets have been slow to respond to rate hikes, which has kept pressure on wages, but an economic slowdown in the near term should result in higher unemployment and slowing wage growth.

Though costs in Argentina were modeled, they are not presented in Figure 6 due to extreme skewing of the chart. Argentina has some of the highest inflation in the world, and annual average FM inflation was high prior to the pandemic (34% per year). By 2022, that figure reached 70% and is expected to hover near 100% in 2023-2024.

Figure 6: Americas – Average annual % change in CBRE FM Cost Index by select country

Source: BLS CES & PPI, Oxford Economics, Mercer, CBRE Strategic Investment Consulting, Data through Q1 2023.
Note: Eurozone includes Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia and Spain. Pre-pandemic is the 2017-2019 annual average.
Methodology Notes: Global variation is modeled by incorporating CPI to estimate contract cost differences and overall wage growth to estimate wage differences, using data provided by Oxford economics. Wage growth forecast (2023-2024) is adjusted using more precise job-code forecasts from Mercer.

FM cost inflation is expected to be higher in European countries in 2023, relative to North America and Asia

Non-Eurozone countries such as the U.K. and Poland are expected to experience lingering inflation relative to those in the Eurozone.

Monetary policy tightening (via interest rate hikes) by the European Central Bank (ECB) has weakened economic growth in the Eurozone but has generally curbed inflation through the first half of 2023. The ECB is expected to pause rate hikes after Q3 2023, as long as core price inflation continues to approach 2% and the potential recession is not severely worse than expectations. ECB action combined with slack in most Eurozone labor markets should keep FM inflation rates trending toward pre-pandemic norms.

In the U.K., inflation has been more challenging and is expected to be stickier than much of Western Europe. The labor market is much tighter in the U.K., with a Q1 2023 unemployment rate that is 270 bps lower than the Eurozone average, which has led to higher and prolonged wage growth.

In Poland, and much of Central and Eastern Europe, headline CPI (which includes more volatile commodities like food and energy) has been declining more rapidly, but core inflation has been stickier due in large part to aggressive wage growth. Poland is not expected to reset to pre-pandemic FM inflation until 2026-2027.

Figure 7: EMEA – Average annual % change in CBRE FM Cost Index by select country

Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.
Note: Jan 2019=100.
Methodology Notes: Global variation is modeled by incorporating CPI to estimate contract cost differences and overall wage growth to estimate wage differences, using data provided by Oxford economics. Wage growth forecast (2023-2024) is adjusted using more precise job-code forecasts from Mercer.

Inflation varies more across Asia-Pacific countries, but most will trend closer to the pre- pandemic level by 2024

With the notable exceptions of Japan and China, monetary tightening has been mostly consistent across Asia-Pacific central banks, which combined with supply chain rebalancing has helped stem inflation in 2023.

China is unique in the region, in that CPI has been a relative non-factor (see Figure 24) due to low economic growth during the “zero COVID” policy era, but wage growth has been higher than many other Asia-Pacific countries (see Figure 29). This has kept FM cost growth ahead of CPI, but as China continues to reopen, economic growth should put more upward pressure on domestic costs and may even influence cost growth throughout the region.

Australia is expected to take longer to return to pre-pandemic FM cost inflation. CPI inflation peaked at the end of 2022 and is expected to slowly trend downward (though above pre-pandemic levels), but the extremely tight labor market is expected to drive higher wage growth in the next two years.

India has had strong and resilient economic growth, and that is expected to continue, which is putting pressure on prices and driving wage growth. India’s growth expectations should keep FM cost inflation higher than Asia-Pacific counterparts.

Figure 8: APAC – Average annual % change in CBRE FM Cost Index by select country

Source: BLS CES & PPI, Oxford Economics, Mercer, CBRE Strategic Investment Consulting, Data through Q1 2023.
Note: Eurozone includes Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia and Spain. Pre-pandemic is the 2017-2019 annual average.
Methodology Notes: Global variation is modeled by incorporating CPI to estimate contract cost differences and overall wage growth to estimate wage differences, using data provided by Oxford economics. Wage growth forecast (2023-2024) is adjusted using more precise job-code forecasts from Mercer.