Volatility in labor costs prompts pause for thought in new construction

Despite some growth in construction spending nationwide in the first half of 2019, San Francisco saw a 50% reduction in planned developments, creating a five-year low for developments in the city. That’s strange for a city with so much leasing activity, and little sign yet of any drop-off in tenant demand. So, what’s the behind the slowdown?

One clear culprit is the availability and cost of skilled labor. It’s long been known there is a labor shortage in the construction trades but that shortage seems to be worsening. A shortage of skilled workers is not only the biggest challenge facing the sector, it’s also highly likely to continue to push the cost of labor higher. JLL expects already high labor costs to increase by as much as 3% in 2020.

Materials costs steady

The good news is that overall construction costs have been less affected by volatile material prices. While average material indexes have increased, prices for steel, lumber and gypsum have declined. JLL expects materials prices to remain relatively stable in the coming year, barring any unforeseen shocks to supply.

Nevertheless, the shock of increasing labor costs has led to at least a couple of local development projects go on hiatus because increased construction costs made projected developer returns less appealing. This is especially critical for developers seeking to sell soon after completion or a project has been stabilized.

Is PropTech the answer?

Rising industry costs are one reason that players like Skanska, have joined a host of proptech start ups, to develop digital tools designed to bring greater efficiency to many aspects of the construction process. These tools include primary impact technologies such as digital collaboration tools, interior scanning, construction drones and modular construction. They also include secondary impact technologies app-based marketplaces for tools and equipment, safety-enhancing wearables and fintech tools such as automated payments processing.

Adoption of these tools will vary and some will advance faster than others. Interior scanning, for example, is already being utilized quite broadly for site surveys, weekly construction meetings and other visual use cases but not as a connection to a real time model. Yet, within ten years, the use of interior scanning to create a “digital twin” for major projects will be a prerequisite. Similarly, drones are expected to become ubiquitous on construction sites within the next two years.

JLL Spark, now part of JLL Technologies, is also making significant investments in real estate technologies that are aimed at increasing the overall value of a building and improving productivity for occupiers. For example JiLL, an AI-powered smartphone app, was recently released to help employees streamline work processes like scheduling meetings and conference rooms.

However, the technology likely to have the biggest direct impact on the skilled labor shortage is still in its early days of development. Robotics has the potential to replace some skilled construction labor tasks such as laying rebar or bricklaying, but the current risks and liabilities mean that it is currently being used purely on a one-off basis on unique projects.

Yet, despite the challenges and the need for further innovation, technology offers the opportunity for shorter construction schedules, improved safety, reduced environmental impact and, perhaps most importantly, overall cost savings.