Construction cost escalation set to ease across the US

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The US construction industry is standing steadfast amid the uncertainty of the past couple of years. (Photo by Scott Blake on Unsplash).

According to Turner & Townsend’s latest USA market intelligence report, construction cost escalation is easing across the US though headwinds remain.

The United States construction sector is proving resilient against recessionary pressures as construction cost escalation begins to ease. However, challenges remain across different regions and cities, according to Turner & Townsend’s USA Market Intelligence Report Q1 2023 Spring.

The global professional services firm has forecast average cost escalation across the US to fall to between 4-8% over the course of 2023 before dropping further to 3-5% through 2024 and between 2-5% in 2025.

Continued inflation is being sustained by high demand for construction across the property and infrastructure sectors. Throughout the country, commercial real estate is performing well, with warehouse and industrial activity being driven by e-commerce.

Meanwhile the manufacturing sector is seeing historic highs of investment, particularly in areas such as semiconductors, EVs and battery plants. This has been encouraged by regionalisation driven by the pandemic, as well as the federal government’s Inflation Reduction Act, the Bipartisan Infrastructure Law and the CHIPS and Science Act.

While these sectors are enjoying tailwinds, the resulting increase in activity will add further pressure to an already stretched labour market across the industry. The residential sector is also being strained by high interest rates that in some regions risk choking off demand and investment.

The broad range escalation forecast across the US as a whole takes an average of key city markets which pinpoint a number of trends within the report, including that the average escalation rates have begun to ease. In New York the rate has fallen to 8.5% due to softening investment compared with pre-pandemic levels, though the city’s office and commercial real estate sectors are still expected to perform well this year.

Cities reliant on the technology sector – which has experienced significant layoffs – have seen particularly sharp decreases in cost escalation. For example, escalation in San Francisco has dropped to 6.5% from almost 20% in 2020.

Meanwhile Turner & Townsend forecasts higher escalation rates to persist in intermediary cities such as those in Texas, Florida and other locations throughout the Southeast and parts of the Midwest as a result of increased migration, investment and high construction activity. As one of the country’s fastest growing regions, Florida is experiencing sustained demand for new projects. Miami is currently the city with the highest rate of escalation at 9%, while Tampa is also high at 7%.

John Robbins, managing director for the United States at Turner & Townsend, commented: “It’s reassuring to see the US construction industry standing steadfast amid the uncertainty of the past couple of years. We are starting to see signs of relief for the sector with escalation beginning to ease on average. However, the extent of this varies depending on the region and the size and economic make up of each city, and material costs continue to be put under pressure by supply chain issues.

“Ours has long been an industry skilled in adapting to changing economic environments. We’re seeing this in New York, for example, where the residential market – struggling with high interest rates – is being buoyed by the redevelopment of commercial real estate into residential and in the Southeast, attractive incentives that are garnering new hubs for manufacturing. We will need this flexibility as we face into regional and national challenges this year and beyond.”

Click here to download Turner & Townsend’s USA Market Intelligence Report Q1 2023 Spring.