Are Industrial Construction Costs Moderating?

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Although the industrial product type has consistently been the bright spot in the CRE world over the past couple of years, issues around construction and materials remain a source of headwinds in the new year, according to a new report from Cushman & Wakefield that covers 43 markets in North America.

Pandemic-connected supply chain problems, combined with inflation and higher interest rates, have all helped push costs higher.

The general contractors Cushman & Wakefield surveyed for its new North American Industrial Costs Guide foresee increased difficulties with both project execution timelines and material lead times. A great majority (85 percent) expect slight (66 percent) to significant (19 percent) increases in material lead times.

Although survey respondents see cost increases slowing, the majority typically foresee costs continuing to rise over the next six months.

READ ALSO: Top Sectors for Industrial Demand: JLL

Labor constraints, too, will continue, with retirements from an aging workforce increasing alongside a lack of younger workers, all of which has effects on both costs and project timelines. “The introduction of skills-based programs for young workers in addition to competitive wages may help fill the talent gap in the coming years,” however, the report states.

Steel, lumber, copper prices

To get into the weeds briefly, here are outlooks for three key materials categories.

• Prices for steel pipe and tube remain about 20 percent higher than 12 months ago but are expected to drop slightly and then level out over the next couple of years.
• After peaking around mid-2021, lumber prices have moderated. Though they’re expected to level out, they will remain above pre-pandemic levels for a few years.
• Copper prices have been volatile, but after peaking at the beginning of 2022, they’ve fallen 16 percent year-over-year. A modest decline is forecast for this year.

Fueled by the e-commerce sector, the demand for industrial space has led to historic levels of construction and competition for materials and labor, Brian Ungles, president, Project & Development Services at Cushman & Wakefield, said in a prepared statement. He added that widespread inflation has driven construction costs even higher.

“New supply has not been able to keep up with industrial demand, but certainly not for lack of trying,” Ungles continued. Since the pandemic’s onset, more than 2.1 billion square feet of industrial space has been delivered globally, with 62 percent of that in the Americas, of which 1.2 billion in the U.S. and 68.4 million in Canada.

“Given recent demand, a significant slowdown in the construction pipeline is not likely anytime soon,” Ungles concluded.

Costly vs. cost-efficient cities for industrial construction

Setting aside Canada and Mexico, the costliest metros in North America for industrial construction are on the U.S. West Coast, and the most cost-effective metros are in the Midwest and South.

Those West Coast markets are, in descending order, Portland, Ore., San Diego, Seattle and Oakland, Calif. In San Diego, for example, costs for medium buildouts average $101 per square foot and large buildouts average $92. The respective North American averages, by comparison, are $84 for medium buildouts and $78 for large.

The most cost-effective metros for industrial construction are Houston, Memphis, Tenn., Nashville, Tenn., and Louisville, Ky.