Are stabilizing construction costs cause for celebration?

Key pric­ing indi­ca­tors begin to show improve­ment, but vig­i­lance is necessary 

The arti­cle rep­re­sents sub­jec­tive opin­ions of Hines, the spon­sor of the invest­ment vehi­cles offered by Hines Secu­ri­ties. Oth­er mar­ket par­tic­i­pants may rea­son­ably have dif­fer­ing opinions.

Con­struc­tion teams around the world are see­ing a slow­ing rate of cost increas­es for some mate­ri­als and com­modi­ties, along with mod­est improve­ments in the sup­ply chain.1 Yet, while the hori­zon appears brighter, con­di­tions are still fluid—especially as labor short­ages and reces­sion­ary fears persist.

Key first-quarter takeaways 

The unprece­dent­ed con­struc­tion cost infla­tion in 2021 and 2022 began to mod­er­ate. After reach­ing esti­mat­ed cost increas­es as high as 16%, con­struc­tion costs have start­ed to sta­bi­lize, with esca­la­tion in the more typ­i­cal range of 3% to 6% expect­ed by the end of 2023.

Fol­low­ing the pandemic’s impact on the sup­ply chain, con­struc­tion sched­ules have length­ened and are expect­ed to remain extend­ed. Many con­trac­tors still have sub­stan­tial project back­logs, although sub­con­trac­tor pipelines have opened up again. Con­struc­tion staffing shortages—exacerbated by the pandemic—are omnipresent, with labor in short sup­ply at all lev­els of field­work and supervision.

Deep dive into materials, labor and supply chain 

The three pri­ma­ry fac­tors affect­ing con­struc­tion pric­ing are mate­ri­als, labor and sup­ply chain transportation.

Con­struc­tion Materials

Com­mod­i­ty pric­ing is flu­id and changes often. Pric­ing for some materials—such as con­crete and cement—has mod­er­at­ed, help­ing sta­bi­lize over­all con­struc­tion mate­r­i­al pricing.


The vast major­i­ty of con­struc­tion com­pa­nies are pressed to retain and/​or add staff in 2023. Com­pa­nies are feel­ing the work­force gap at all lev­els of labor and man­age­ment, and Asso­ci­at­ed Builders and Con­trac­tors (a nation­al U.S. trade asso­ci­a­tion rep­re­sent­ing the non-union con­struc­tion indus­try) projects that hir­ing in 2023 must exceed nor­mal hir­ing lev­els by 650,000 work­ers to meet the dire short­age. The prob­lem is expect­ed to wors­en mov­ing for­ward, with 20% of the cur­rent work­force pro­ject­ed to retire in five years.2 Much of the automa­tion and tech­nol­o­gy upgrades achieved by the indus­try in the last 20 years have not off­set the cur­rent job­site labor crunch.

Hope for eas­ing labor rates will be tem­pered by the entry of large-scale pub­lic and infra­struc­ture projects in 2023, espe­cial­ly in the Unit­ed States and Europe as fed­er­al gov­ern­ment infra­struc­ture fund­ing is put to work. Despite slow­ing down in recent quar­ters and flat­ten­ing out more recent­ly, res­i­den­tial con­struc­tion may fur­ther exac­er­bate the labor shortage.

Sup­ply Chain

Sup­ply chain woes con­tin­ue to impact the avail­abil­i­ty of con­struc­tion mate­ri­als and sup­plies, but the effects have begun to mod­er­ate as air, rail and truck­ing short­ages abate. Notably, air freight vol­umes have decreased in each of the last 12 months (year over year), but this trend is begin­ning to abate.3

Accord­ing to Sta­tista, ocean freight con­tain­er costs sky­rock­et­ed in 2021, with the glob­al freight rate index reach­ing near­ly $10,400 per con­tain­er. Costs declined sharply in mid-2022, falling to $1,700 per con­tain­er in March 2023. These rates have con­tin­ued to trend down­ward along­side air, rail and truck­ing freight charges.

Construction schedules: an exercise in patience 

Labor issues and per­sis­tent­ly long lead times for mate­ri­als and equip­ment have length­ened con­struc­tion sched­ules that will like­ly remain extend­ed for the near future. Pro­posed projects should see improve­ment, but projects cur­rent­ly under­way have been neg­a­tive­ly impacted.

Admin­is­tra­tive require­ments are adding to delays. Build­ing depart­ments in some local juris­dic­tions fac­ing bud­getary con­straints have not been able to keep up with con­trac­tor demand for plan reviews, inspec­tions and more. Large pri­ma­ry mar­kets are bet­ter staffed but have expe­ri­enced much more sub­stan­tial vol­ume. Sec­ondary and ter­tiary mar­kets are not staffed to han­dle any uptick in con­struc­tion activ­i­ty. In addi­tion, many sea­soned and expe­ri­enced build­ing offi­cials retired ear­ly due to COVID or left the indus­try altogether.

Con­trac­tor back­log is still ele­vat­ed, accord­ing to Asso­ci­at­ed Builders and Con­trac­tors March 2023 data, but at 8.7 months, has dropped to the low­est lev­el since August 2022. Con­trac­tor rev­enues, prof­it mar­gins and staffing lev­els were mixed in March com­pared to the pri­or month. Hines’ research shows no evi­dence of over­all project bud­get de-esca­la­tion at this time.

Issues affecting the global outlook 

As in the Unit­ed States, Europe, the Mid­dle East, and Africa (EMEA) and Asia-Pacif­ic (APAC) also expe­ri­enced con­struc­tion cost sta­bi­liza­tion. How­ev­er, EMEA and APAC have been unique­ly impact­ed by the four sig­nif­i­cant issues:

  • Ener­gy costs. EMEA and APAC have seen delays in con­struc­tion mate­r­i­al deliv­er­ies as the high cost of ener­gy means that fac­to­ries can­not always afford to oper­ate their pro­duc­tion lines.
  • War in Ukraine. The war in Ukraine has dis­rupt­ed Euro­pean trade routes, trans­porta­tion, and ener­gy costs.
  • Earth­quake in Turkey. The cat­a­stroph­ic earth­quake in Turkey will like­ly increase the cost of mate­ri­als like rebar/​steel, mar­ble, stone and more.
  • Chi­na reopen­ing”. China’s relax­ing of COVID-19 poli­cies are expect­ed to lead to increased growth in the econ­o­my and grow­ing demand for raw materials/​products in the year ahead.

Close budget management aims to mitigate cost volatility 

The slow­ing of key con­struc­tion pric­ing indi­ca­tors shows promise but these met­rics con­tin­ue to vary wide­ly by region. To com­bat this ongo­ing cost volatil­i­ty, Hines will care­ful­ly scru­ti­nize build costs and sched­ules to be sure return pro­jec­tions are real­is­tic. We believe this time of uncer­tain­ty (like pre­vi­ous down­turns) will shake up the real estate land­scape. Through our research, local exper­tise, and self-fund­ing capa­bil­i­ties, we plan to seize com­pelling oppor­tu­ni­ties for long-term growth as they are revealed.