Cost Indices & Market Trends

Economic and Market Outlook

Heightened economic and geopolitical uncertainty provide the backdrop for this guide.

Equity and bond markets have sold off; inflation is running well above target levels in much of the world with volatile energy prices a contributory factor. Interest rates and financing costs are rising in response to central banks tightening monetary policy. Public finances in some countries are stretched, in part due to the effects of emergency spending during the COVID-19 pandemic and likely to deteriorate further as governments spend on energy cost mitigation measures. However, CBRE's view is that continental Europe is poised to use expansionary fiscal policy to combat high energy costs and an economic downturn. Labor markets combine lower participation levels with skills shortages and unfilled job vacancies in a number of sectors and consumer sentiment has weakened sharply amid declining real incomes. With the war in Ukraine and other geopolitical tensions, the downside risks are considerable.

At the same time, there are some bright spots in the real economy: Air travel and restaurant visits have rebounded, retail spending patterns are broadly positive.

The net effect of these countervailing forces will likely be a recession next year before economic growth resumes. Of the main developed markets, Europe is most impacted in this outlook, with the Asia-Pacific region relatively less affected. World GDP growth is expected to slow to around 1.5% in 2023 (down from 2.9% in 2022) with Europe and the U.S. both seeing moderate declines in 2023. APAC remains the main driver of global growth in 2023 with growth of around 3.5%, matching that of 2022 despite slightly slower growth in some key economies such as India and South Korea.

Persistent inflation presents a policy dilemma for central banks, which are keen to regain control of prices but anxious not to tip economies into prolonged recessions. The inflation position reflects a wide range of factors, including excess demand for high-value manufactured goods. This demand has been aggravated by supply chain bottlenecks and shortages or extended delivery times for some interim components such as semiconductors. These are mostly easing as consumers spend more on services. Other inflation components are also starting to abate as supply chains loosen up, fuel and food costs stabilize and goods inventories rise—so we expect lower rates of global price growth in 2023 than in 2022, but inflation will still remain elevated for a while yet. Optimistically, short term inflation cost rises will create less demand on supply chain. This will alleviate the pressures on supply and help stem inflation.

Consumer Price Index (CPI) inflation for Europe, UK and US will average 3.5%, 3.1% and 2.7% respectively—down from 2022 rates but still well above target of about 2%. 

The construction sector has experienced particularly acute cost pressures reflecting its high dependence on energy and raw materials such as lumber, which have been particularly volatile. In Africa and parts of Latin America and APAC, rapid cost inflation in materials and services has had the effect of reducing the shelf life of tender offers to as little as two weeks; and more generally project schedules and contingencies have expanded. After a period of rapid growth, we expect the rate of construction cost inflation generally to ease in 2023, particularly in Europe and North America, and project viability to improve as a result. The recent challenging cost environment has caused many occupiers to refocus their capital spend from office fit-out to asset preservation/replacement, or to reallocate it altogether to operational expenditure. Evidence suggests that this gap is closing and slight reductions are available in FF&E in APAC markets, but manufacturers and suppliers likely will remain cautious to avoid inventory depletion. At the same time, tightening ESG regulation in some countries likely will strain corporate budgets. Prudent cost management will remain imperative.

Figures 21-25 illustrate the changes in various markets and show common issues faced in each location.

Market Outlook

Using London as point of deviation, this radar shows each cities’ average project cost in relation to other countries.

Figure 21: Global Radar Graph

Source: CBRE Insights, 2022.

Figure 22: EMEA Radar Graph

Source: CBRE Insights, 2022.

Figure 23: APAC Radar Graph

Source: CBRE Insights, 2022.

Figure 24: NAM Radar Graph

Source: Source: CBRE Insights, 2022.

Figure 25: LATAM Radar Graph

Source: CBRE Insights, 2022.