Rising construction costs increasingly pressure new development
- Jacob Rowden
While office leasing remains subdued, rising construction material and labor costs, as well as costlier lending, are increasingly stifling new construction activity, providing landlords with some relief from new supply.
The producer price index for construction materials has accelerated at twice the pace of the CPI during 2022, wage growth in the construction sector has outpaced other private industries, and policy rates have increased 375 basis points since January—all causing costs of development to swell, while asset pricing in private and public markets has declined notably.
Increased economic pressures will continue to limit the supply pipeline for office: total space under development has already declined 30.9% from peak cyclical levels in Q1 2020, and continues to decline as projects under development deliver and groundbreakings slow.
After hitting a cyclical high, vacancy rates are poised to plateau as office supply and demand levels come into greater parity.