Rising construction costs limit new supply
US commercial building costs have risen dramatically. Average replacement costs are now well above existing asset values. High costs are holding back new construction and driving appreciation and rent growth of existing assets.
These challenges have arisen because of
Construction labor shortages: especially prevalent amidst skilled or 'craft' subcontractors, and construction wages have increased about 40 per cent. As well, non-US citizen workers are facing visa challenges which is impacting labor availability.
Fluctuating commodity prices: Over the past few years, material prices have fluctuated significantly, which can present greater project risk. Hard costs typically represent 60 to 70 per cent of the total project costs (whereas soft costs are more like 30 per cent).
Rising land costs: Land prices are high nationwide, mostly due to global institutional investment. Consequently, investors, developers, and construction lenders continue to exercise great caution.