Build costs – construction challenges to continue
The current construction and real estate landscape present significant challenges but also opportunities.
3 minutes to read
The market recovery following the shocks of the Covid pandemic is gaining traction, with headline metrics on-demand moving further into positive territory with each passing week. With supply still tight in many locations, imbalances are developing, fuelling anticipation of rental growth and an uptick in development activity.
But with construction costs in the UK continuing to escalate and additional expenditure increasingly required to respond to a tightening sustainability agenda, the pricing pressures on office development have never been more significant as we begin 2023.
Although easing, manufacturing and supply chains remain disrupted, whilst shortages of labour, products, and inflated energy prices make vital components more expensive. The impact is being felt most acutely in construction, with an 18% rise in the BCIS All Work Material Price Index in 2022, having already registered a double-digit surge the previous year. Price fluctuation clauses now form part of contractual negotiations for many larger projects, leading to reduced cost certainty on projects that may be reaching their viability point anyway.
The sharp rises in the cost of materials are widely thought to have plateaued, with modest rises of around 2% forecast for the coming year. Even so, increases in the cost of labour will maintain pressure on developers and build projects in 2023. According to BCIS, labour costs are set to rise by 6.3% in the coming year, driven principally by labour shortages and the cost-of-living crisis.
The availability of workforce is a particular problem. The latest employment statistics from Oxford Economics indicate that construction-related labour has reduced by 10% since 2019. There are roughly 244,000 fewer workers in the construction sector compared to three years ago, attributable to workers returning to the EU and early retirees. And this shortage is particularly affecting SME builders since it takes a minimum of three years to train a skilled tradesperson. Therefore, with labour shortages expected to stay, site rates will increase as required.
Whilst balancing labour and material costs are familiar challenges with greater transparency for developers and construction firms, responding to the growing regulation and preferences of environmental responsibility is a more difficult task.
“Nice to have” has become the new norm. Organisations and investors alike now apply greater scrutiny to the environmental impact of real estate. In 2023, all existing tenancies will need to achieve at least EPC E, and landlords must prepare for a minimum EPC B rating from 2030. Additionally, as part of the UK’s drive to achieve net zero carbon, large investors must now report publicly on their carbon emissions. Consequently, each element of the property value chain will need to provide accurate carbon data. This puts a greater onus on real estate certification, with highly rated accreditations targeted by developers and landlords.
The combination of all of these cost pressures and the use of new suppliers will undoubtedly challenge build viability. Design teams will be under pressure to deliver more for less, particularly post-novation, when contractors look to value engineer schemes to drive cost savings. Creating a narrative to market schemes will require more studies, data collection and reporting throughout the design and construction process to show how ESG requirements have been achieved. In short, land prices remain high, construction costs continue to increase, and occupier, investor and lender demands around ESG are growing. It will be interesting to see what gives first.