The latest North American Quarterly Cost Report from Rider Levett Bucknall (RLB) suggests growing certainty in costs should become a source of relief to owners, but Toronto remains a concern as construction costs in the city continue to grow at a stubbornly high rate.
The new report from the international property and construction consultancy, released July 3 and covering 14 North American cities including Calgary and the Ontario capital with data up to Q2, also indicates the construction labour market, while still a concern, no longer remains the intense source of stakeholder anxiety it was a year or two ago as cost spikes are slowing.
Year-over-year (YOY), the U.S. national average increase in construction costs is approximately 5.41 per cent, compared to 5.85 per cent YOY in the first quarter.
Toronto hikes continue
But in Toronto, the annual change registers as 7.94 per cent, while the annual rate in Calgary is 6.67 per cent.
“You want to try and keep that average around three, four per cent per year,” said RLB North America president Paul Brussow. “So when it increases to six, seven, eight, nine, 10, 11 per cent, it creates uncertainty…so therefore it makes it harder for developers to make decisions on whether or pull the trigger on these projects.”
Generally, Brussow said, the construction industry continues to experience strong demand, despite projected high interest rates and increasing labour costs for the rest of 2024. He said he was “cautiously optimistic” about prospects for the sector in the near term despite the approaching U.S. presidential election and potential policy adjustments.
“Nevertheless, overall growth in the construction sector is expected to remain positive this year.”
Brussow noted newer concerns are becoming more prominent in the bundle of costs owners and contractors are facing. The rising cost of bonds and insurance in the last half year is increasingly worrisome, he said.
Costs rarely go down in the construction sector with the exception in recent times of the global recession of 2007-2008, he said, so what owners look for is moderation in cost increases and certainty.
“What we saw in 2021 and ‘22 was huge spikes in material costs, mainly around transportation, just the volatility of being able to get materials…during COVID-19 and so forth,” he said. “So we did see significant increases in construction costs during that 2021-22 period.
“Now what we’re seeing is obviously not at the same increase. Materials have very much stabilized.
“Having better understanding, having better certainty as to the direction of where costs are going allows people to predict a lot easier whether or not those projects can go ahead.”
Canada has had its first interest rate cut while the U.S. is still waiting, Brussow noted. Investors prefer lower rates, of course, he said, and they still haven’t got used to the higher rates that will become the new normal.
“That takes a bit of time.”
Data centres on the rise
Investors also rely on the RLB costs reports for data on variances in both regional costs and between sectors.
In the U.S., the range in annual cost increases goes from four per cent in San Francisco to 7.67 per cent in Chicago April to April. In absolute terms, New York and San Francisco are the two priciest regions for construction investors, both over 50 per cent more expensive than Denver.
As for a sub-sector in his lens, Brussow barely hesitates – it’s data centres on the East Coast.
“I don’t see that going away…I think that’s the sector that’s going to continue to grow fairly aggressively,” he said.
Viewed quarterly, the national average increase in construction costs in Q1 was 1.12 per cent over the previous quarter. Boston, Chicago, Denver, Honolulu, Los Angeles, Portland, San Francisco and Washington, D.C. experienced increases over the national average.
Denver, Las Vegas, New York, Phoenix and Seattle experienced gains that were less than the national average.
RLB analyst Antonio Gonzalez, based in Calgary, said government promotion of new housing, among others factors, should spur continued growth of the construction sector in both Toronto and Calgary. “Investors are more confident in new developments,” said Gonzalez of Calgary.
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