Rising construction costs impact capital markets
March 20, 2020 | Colorado Real Estate Journal
Denver is in the midst of strong development in nearly all commercial real estate asset types. In conjunction with high development demand comes increased, and still increasing, construction pricing. While most of the discussion around capital markets pricing is driven by debt markets, the availability of capital and the cost of that capital, construction pricing is having a growing impact on valuations, seen in a variety of ways in investment sales and owner/user sales.
The rise of construction costs and coping mechanisms. Construction pricing naturally increases with the amount of demand across all sectors, but labor costs and risks around raw material costs have created an environment of exponential increases. While the looming trade war with China presented some cost risk around raw materials used in construction, those increases have been dwarfed by increasing labor costs. Labor costs continue to drive increases in construction pricing as skilled trade workers are difficult to find.
The weighted average per square foot cost for new construction in the office sector was $241 per sf in 2019, up $65 from 2016, according to CBRE’s Econometric Advisors Supply Track. This 22% increase over three years has impacted all stakeholders in the commercial real estate market.
