In the first half of 2023, the commercial construction market is still in the phases of recovery from the impact of the pandemic, which caused delays, disruptions and cancellations of many projects. In this update, we dive into the current environment of commodity pricing, permit timelines by area, regulations, and some of the macroeconomic conditions that underly construction costs and project demand.
According to the U.S. Census Bureau, the value of commercial construction built in May 2023 was $1,925.6 billion, which is up 2.4% from last May. The sectors that showed the highest growth YoY were manufacturing, (76.3%), conservation and development (+29.3%), and lodging (+20.9%). However, the market continues to face challenges such as labor shortages, rising material costs and supply chain issues.
One notable evolution in the last few years is the increased demand for green and sustainable buildings, as well as flexible and adaptable spaces that can accommodate changing needs and preferences of tenants and customers.
Most construction costs are trending back to normalized pricing after experiencing significant volatility associated with pandemic disruptions. After extremely high pricing for many materials, we’re seeing significant YoY decreases for several commodities.
Key Insights
- Construction Input costs have largely stabilized over the last 6 months following disruptions associated with pandemic restrictions and global conflict events. The current marketplace reflects construction input costs consistent with long-term trends and norms.
- Material availability and procurement durations are extended from historical norms, but timelines are stable and predictable. The interruptions in supply chains from pandemic restrictions led to the decoupling and deglobalization of many supply chains: many inputs previously supplied from overseas partners are now manufactured in much closer geographic proximity to their eventual project application. This transition has led to longer lead-times in some cases while regional manufacturing capabilities are being developed, although consistent and stable overall.
- Demand for construction service has increased steadily over the last 12 months, resulting in slightly increased labor costs. Nonresidential construction employment has increased 3.1% YoY, and average earnings have increased 5.4% over the last 12 months. Earnings growth in construction has outpaced the broader private marketplace by around 1.0%. Construction unemployment has remained stable over the last 12 months at 3.5%. Private nonresidential spending has increased 20.9% over the last 12 months.
- Nonresidential construction employment has increased 3.1% YoY, and average earnings have increased 5.4% over the last 12 months. Earnings growth in construction has outpaced the broader private marketplace by around 1.0%. Construction unemployment has remained stable over the last 12 months at 3.5%.
- Private nonresidential spending has increased 20.9% over the last 12 months.
- Backlog indicator remains stable; confidence is increasing.
- Workforce productivity has increased over time as technology enables more work output with less time input, and as competitive and tightening market forces require that only the best and brightest talent is retained. Monetary inflation counteracts this trend, as pricing inflation has outpaced productivity gains – which still results in a relative increase in construction pricing over time.
Construction Input Cost Index
Source: US Bureau of Labor Statistics
Construction materials have experienced extreme pricing volatility in the past few years due to trade regulations, supply chain disruptions, and changes in supply and demand. As the costs for manufacturing, labor, and shipping increased, the market pricing did as well.
Many construction materials are returning closer to typical pricing, with the help of infrastructure spending and slightly stabilizing supply/demand.
Construction Materials Cost Index
NOTE: You can toggle each material data set on/off by clicking the description.
Source: US Bureau of Labor Statistics
Concrete: -2.47% YoY
The cost of concrete declined by 2.47% YoY, as the demand for residential and nonresidential construction slowed down. Concrete is expected to remain stable or slightly decrease in the near future.
Copper: -12.5% YoY
The cost of copper dropped by 12.5% YoY, due to a combination of factors such as oversupply, trade tensions, and weaker global demand than expected. The demand for copper is expected to increase over the mid-term from the renewable energy and electric vehicle sectors.
Fabricated Metal Products: +4.67% YoY
The cost of fabricated metal products increased by 4.67% YoY, as the demand for metal products remained strong from the manufacturing and industrial sectors. The Infrastructure Investment and Jobs Act and the CHIPS and Science Act of 2022 are expected to boost the demand for metal products in the US, in addition to increases in construction demand overall.
Gypsum Wallboard: + 12.13% YoY
The cost of gypsum wallboard surged by 12.13% YoY, as supply was constrained by transportation issues and environmental regulations. The outlook for 2023 is stable, as the demand for gypsum wallboard is expected to remain steady from the residential and nonresidential sectors. However, the price of gypsum wallboard is expected to continue to increase through 2030.
Iron and Steel: -14.29% YoY
The cost of iron and steel declined by 14.29% YoY, as the global steel production exceeded the demand amid a slowdown in China’s economy. The outlook for 2023 is anticipates costs to increase, due to increased infrastructure spending and the onshoring trend among American manufacturers.
HRC Steel: -20.57% YoY
The cost of HRC steel dropped by 20.57% YoY, as the global steel market faced oversupply and trade disputes.
Insulation: +8.35% YoY
The cost of insulation rose by 8.35% YoY, as the demand for insulation increased from the residential and commercial sectors due to energy efficiency and sustainability goals. The outlook for 2023 is for continued cost increases, as demand for insulation expected to increase from green building initiatives and infrastructure spending.
Lumber: -56.29% YoY
The cost of lumber plummeted by 56.29% YoY, as the lumber market experienced a correction after reaching record-high prices in 2021. The outlook for 2023 is uncertain but anticipated to remain relatively stable, as the lumber market will find equilibrium among supply and demand factors such as mill capacity, housing starts, home improvement spending, and trade policies.
Plumbing Fixtures/Fittings: +1.08% YoY
The cost of plumbing fixtures/fittings increased slightly by 1.08% YoY, as the demand for plumbing products remained stable from the residential and commercial sectors. The outlook for 2023 is for a generally stabilized but slightly increasing cost environment, as the plumbing market is expected to grow slightly from renovation and remodeling activities and recent infrastructure spending.
Switchgear: +11.17% YoY
The cost of switchgear jumped by 11.17% YoY, largely due to higher raw material costs and increased transportation costs. Switchgear prices are expected to increase further in 2023, as the demand for switchgear increases from various sectors such as data centers, renewable energy, and electric vehicles.
Source: US Bureau of Labor Statistics
Petroleum: -20.4% YoY
The cost of petroleum plunged by 20.4% YoY, as the COVID-19 pandemic reduced the demand for oil and gas. The outlook for 2023 and beyond is uncertain, as the recovery of the global economy and OPEC+ production cuts may support the oil prices, but the rise of alternative energy sources may limit overall demand.
Natural Gas: -68.53% YoY
The cost of natural gas decreased by 68.53% YoY, as the natural gas market faced excess supply and a decline in demand due to mild weather and lower economic activity. The outlook for 2023 is for continued volatility with expected pricing surges, though not as extreme as those seen in recent years. The market will be influenced by factors such as weather patterns, storage levels, LNG exports, and pipeline infrastructure.
Permit Timelines
Source: Local Data
Procurement Timelines
Source: Local Data
Most material procurement timelines have returned to more stabilized durations after significant procurement volatility due to the pandemic and resulting recent supply chain disruptions. Still, many lead times are extended relative to historical norms for some specialty items, fixtures, and equipment. Based on our local data, these are the trends we’re seeing for material procurement.
- Framing – Steel Studs: Generally normal lead times of 1-4 weeks, but specialty sizes or thickness can have extended times of 4-6 weeks.
- Specialty Grid/Tiles: Extended lead times of 4-16 weeks, which can vary greatly depending on specifications.
- Architectural Metals / Metal Panels: Extended lead times of 16-20 weeks.
- Axiom Trim and Clouds: Extended lead times of 8-12 weeks.
- Demountable Partitions: For the most part, these items have all returned to normal lead times.
- Wood Doors: Paint grade and wood frame doors tend to have returned to normal lead times, but we have experienced significantly extended lead times for prefinished wood doors of 18-20 weeks. Historically, prefinished wood doors have been 7-9 weeks.
- Storefront Systems: We have recently experienced extended lead times for all storefront systems. Standard systems are currently at 6-9 weeks, while specialty systems can take up to 20-24 weeks. Historically, these lead times have been 4-6 weeks for standard and 16-18 weeks for specialty, respectively.
- Operable Walls: The popular operable wall systems come in many brands. Lead times for LaCantina and Solar Innovations are currently around 18-19 weeks, while Kawneer and NanaWall have extended lead times of 28-29 weeks and 22-27 weeks according to their distributors. This increase is due to extended fabrication times.
- Relite Glazing: Our team has experienced extended lead times of 3-5 weeks for these items, but we’re continuing to see progress that this is returning to a more normalized 2 week lead time.
- Carpet: The lead time for carpet is generally extended, but varies depending on the product. Our experience is generally 6-8 weeks, and even some quick-ship items which previously arrived in 2 weeks now take 4-5 weeks to procure.
- Casework: Custom casework items currently have extended lead times of 14-16 weeks, with some vendors fully booked for months.
- Hufcor Fabric and Glass: Hufcor fabric and glass partitions currently have extended lead times of 10-15 weeks. We notice that these lead times tend to increase in the summer.
- Lighting Fixtures: Although standard lighting fixture lead times have historically been 3-5 weeks, this has often increased to 6-10 weeks depending on selections. Specialty lighting fixtures currently have lead times of 9-12 weeks.
- Interior Terminal Units (Mechanical Equipment): We are experiencing extended lead times of 12-14 weeks for VAV’s and VRF Equipment. However, some specific manufacturers and equipment are as quick as 4-6 weeks.
- Exterior Packaged Units (Mechanical Equipment): We are currently seeing extended lead times of 25-35 weeks for rooftop equipment.
Global Events
Supply chain issues / disruptions
The last two years have seen significant delays and bottlenecks in the movement of materials and equipment across borders, impacting the availability and cost of construction inputs. Some countries imposed strict COVID policies that disrupted production and transportation, while others have sought to diversify or localize their supply chains to reduce dependence on foreign sources. These changes created uncertainty and volatility for contractors and developers who rely on imported goods. Fortunately, we’re beginning to see an improvement in shipping and procurement timelines from 2022 to 2023.
Economic events / forecasts
The global economic growth rate is projected to fall from 3.4% in 2022 to 2.8% in 2023, before settling at 3% in 2024, according to the International Monetary Fund. The US economy is expected to grow in 2023, supported by fiscal stimulus, consumer spending and business investment. On the other hand, inflation is expected to remain elevated due to expansionary monetary policies enacted in response to the pandemic.
Input pricing
The prices of key construction inputs, such as energy, commodities and labor, rose sharply in 2021 and 2022 due to strong demand, limited supply and monetary inflation. Energy prices also increased, driven by rising oil and gas demand and supply constraints. Commodity prices surged to all-time highs over the same period, reflecting strong demand and trade tensions. Most of these factors are beginning to stabilize from 2022 to 2023, but many remain elevated with increased prices and longer lead times.
National Events
Interest rates
The Federal Reserve continuously raised its benchmark interest rate in 2022 in response to rising inflation and robust economic growth. As of May 4, 2023, the Fed raised interest rates once again to 5.25%, the highest in nearly 16 years. Higher interest rates increase the cost of borrowing for construction projects, which dampens demand and investment in many segments, especially those with long-term horizons or high leverage ratios.
Monetary inflation
The US inflation rate accelerated to 6.8% in November 2022, the highest level since 1982, driven by surging energy and food prices, supply chain bottlenecks and labor shortages. The Fed expects inflation to moderate to 2.6% by the end of 2023. Some analysts warn that inflation may persist longer than expected due to structural changes in the economy, such as higher wages, lower productivity and reduced global competition. Inflation reduces the real value of construction contracts and revenues, while increasing the cost of materials and labor.
Political activity affecting construction
The Biden administration enacted two major infrastructure bills in 2022: the Infrastructure Investment and Jobs Act (IIJA), which provides $550 billion in new spending over five years for roads, bridges, transit, broadband, water and power systems; and the CHIPS for America Act (CHIPS), which provides $52 billion in incentives for domestic semiconductor manufacturing. These bills are expected to boost demand for construction services in various segments, such as transportation, utilities, data centers and manufacturing facilities.
Regional Environment – Seattle, WA
Labor availability
The construction labor market in Seattle is tight due to strong demand for workers from both public and private projects, as well as competition from other industries that offer higher wages or better benefits. However, Washington has some of the highest growth in construction jobs in the nation. According to the Associated General Contractors of America (AGC), Washington has added 4,300 construction jobs month over month in May, a 1.8% increase ranking the highest in the nation.
Project demand
The demand for construction projects in Seattle remains high due to a combination of factors, such as population growth, urbanization, technology innovation and environmental sustainability. Seattle remains one of the top metro areas in the country for construction starts, according to Dodge Construction Network.
Regulatory/code changes
The construction industry in Seattle is subject to various regulations and codes that aim to ensure safety, quality and sustainability of buildings and infrastructure. Some of the recent or upcoming changes that affect the industry include:
- The adoption of the 2018 International Building Code (IBC) by Washington State in July 2021
- The implementation of Seattle’s Energy Code (SEC) in March 2021
- The enactment of Seattle’s Green New Deal (GND) in August 2019 and increased funding in 2022
High taxes
Washington has one of the highest tax burdens for businesses in the nation, according to a study by Ernst & Young. The state levies a business and occupation (B&O) tax on gross receipts, rather than net income, which significantly impacts low-margin industries like construction.
Environmental regulations
Washington has some of the most stringent environmental standards for construction projects, such as stormwater management, greenhouse gas emissions reduction, wetland protection and endangered species conservation. Seattle takes these regulations even farther with its own energy code and green new deal.
Seismic risks
Washington is located in a seismically active zone, which poses risks for buildings and infrastructure during earthquakes. The state requires seismic design and retrofitting for certain types of structures, such as schools, hospitals, bridges and dams. This creates additional responsibility for builders to ensure that all new construction meets seismic regulations.
