Construction costs rise as global market balance booming demand with supply chain disruption.
In a year of rapid and sustained inflation, US cities dominate the rankings of the most expensive places in the world for real estate development, as overheating markets threaten to curtail burgeoning pipelines post-pandemic.
The International Construction Market Survey (ICMS) from global professional services consultancy Turner & Townsend, published today, shows record cost escalation across global real estate. On the back of rising demand and the release of pent-up investment, 30.7 % of city markets are reporting construction inflation for 2022 of 10% or more, with no correction or fall in costs expected soon.
San Francisco has become the most expensive city in the world in which to build, at an average cost of $4,729 per sqm, with the US also accounting for four of the top ten most expensive markets, and nine of the top 20. The high US costs reflect the impact of significant ongoing supply chain disruption and labour shortages meeting a surge in demand, especially for residential construction.
Japan and Switzerland also feature prominently. Tokyo ($4,665 per sqm) and Osaka ($4,559 per sqm) place second and third respectively with New York in fourth ($4,517 per sqm). Geneva ($4,332 per sqm) and Zurich ($4,286 per sqm) sit at fifth and sixth.
Market ‘temperatures’, which measure pressure on local supply chains based on volume of demand and tendering conditions, also reflect an industry facing tough challenges. 38.6% of markets surveyed were classified as ‘hot’ or ‘overheating’ – where conditions are deemed at risk of acting as a brake on development. This is up from just 10% percent in 2021, while the number of ‘cold’ markets felt from six to only one.
North America, where no markets were hot or overheating in 2021, has seen the most marked rebound. Now there are seven overheating markets – Austin, Houston, Phoenix, San Francisco, Montreal, Ottawa and Toronto.
Neil Bullen, global managing director, real estate Turner & Townsend, said: “We face headwinds on multiple fronts across the global construction sector and the wider international economy. The continued interconnectivity of markets is clearer now than ever, as we see near universal inflationary trends founded on construction labour shortages, demand exceeding supply, and disruption in supply chains hitting costs and programmes.
“Companies need to adopt a wider, global view of their construction supply chains to manage the uncertainty as we brace for further challenging months.
“Alongside this, clients must manage other key priorities such as the push to net zero as we look ahead to the likely tightening of expectations and requirements for green skills and sustainably sourced materials. Such moves risk exacerbating pressures if not planned for and carefully managed. Success in tackling all these global challenges will come down to enhancing performance – companies finding ways to innovate in the procurement, delivery and management of their projects.”
Super sectors lead post-pandemic growth
The report points to a number of key sectors as driving growth – and costs – across global real estate. The top performing sector for 2022 is industrial, manufacturing and distribution space, led by the vast growth in e-commerce as well as pharmaceuticals manufacturing.
In second and third places are residential and social housing, and transport (road rail and ports) – which last year were placed fourth and second respectively. Housing has benefited from a period of historically low interest rates, though as central banks now act to curb inflation a softening in the market is expected.
A notable jump has been seen in commercial office development, which rose from 15th place in 2021 to fifth this year, an indicator of the returning demand for office space post-pandemic.
Turner & Townsend is warning that construction business must take a global view and brace for further increases in construction costs.