KEY FINDINGS
The worst of supply chain stress is likely behind us, but geopolitical tensions and economic uncertainty will continue to impact supply chains, potentially resulting in increased costs and extended project timelines in 2024.
General contractors (GCs) are seeing supply chain relief in their buildouts; expectations for steady or even shorter timelines have increased from last year. However, some key components— including electrical switchboards and generators—continue to have extended lead times of 40+ weeks.
Commodity and construction costs grew at historically high rates in 2021 and 2022. Price growth has generally decelerated and, in a few cases, commodity prices declined in 2023 (e.g., steel and lumber). Still, costs are likely to remain high in 2024.
Much of the increase in construction “volumes” is due to price increases as opposed to real growth in construction project activity. The cost of construction has been driven up the last few years by various levels of supply chain stress, materials inflation, interest rate increases and wage growth. All of this creates challenges for those tenants attempting to keep fit outs within budget.
Persistent labor constraints are reflected by GC pessimism that labor costs will continue to increase. Attracting skilled talent with higher wages and attractive benefit packages is one of the tools used to fill open positions. Construction has an older than average workforce so disproportionate retirements (of skilled field leaders and foremen, for example) create upward wage pressure when retirees are replaced.
The heightened bifurcation within the office market will force older assets to undergo upgrades to remain competitive. Occupiers will have fewer new office assets to choose from over the next few years, but there will be an increase in upgraded and renovated buildings to consider.
