Going into a New Year, everyone has an interest rate prediction. We thought we’d look at expectations for construction costs instead.
Aided by the 0.5% Federal Reserve cut in the Federal funds rate in November, the second such cut of the year, Q3 of 2024 saw the lowest quarterly rise in construction costs in 3 years and the lowest year-over-year rise in over three years . On the flip side, there continues to be a lack of skilled construction labor available, pushing wages up as the unemployment rate in the sector fell 0.7% to 3.2% overall.
Whether or not costs continue to rise will depend on a couple of different factors. Should interest rates continue to fall, you can expect lower costs across the sector. Other influences, however, are harder to predict. Material costs, influenced by macro factors such as regulatory policy – for example, with respect to tariffs — as well as global supply chain patterns, often rise and fall at the whims of larger scale forces. Local forces such as the continued recovery from natural disasters across the Southeast will impact supply chains which could lead to higher prices.
Some sources, such as Jones Lang LaSalle, forecast a 5-7% rise in costs in 2025, but others see the Q3 rise as a sign the costs will continue to plateau for the foreseeable future. While many variables cannot be known with much certainty, we think it is reasonable to expect a rise in costs for 2025 somewhere in line with the 3-5% annual increases seen before the pandemic. That kind of stability would lead to fewer delays, a more competitive bidding environment, and an overall increase in the development of new projects. An increase in costs closer to the 2021-2023 increases (>10% annualized) would cause an abrupt slowdown in both current projects and the development cycle of new ones.