Home AEC Construction Costs Level Off in Seattle in Q3 2023 As Market Adjusts...

Construction Costs Level Off in Seattle in Q3 2023 As Market Adjusts to New Realities

Seattle, Mortenson, Capitol Hill, RLB Crane Index, AIA/Deltek Architecture Billing Index
Photo by Sean Benesh on Unsplash

The non-residential construction industry in Seattle is facing a complex landscape in the third quarter of 2023, with both challenges and opportunities on the horizon. As the nation grapples with high interest rates, Seattle’s construction sector has managed to keep costs essentially flat, perhaps as a result of market dynamics and significantly lower demand for construction services.

One key factor contributing to this leveling is the flattening of material costs and lead times. After enduring successive quarters of cost increases caused by the global supply chain crisis and the ongoing impact of the COVID-19 pandemic, the construction industry is finally seeing some relief, according to a report by Mortenson. In Seattle, non-residential construction costs increased by a mere 0.02 percent in the third quarter of 2023. This aligns with the steady construction activity in the region, as evidenced by the Rider LevettBucknall RLB Crane Index.

The RLB Crane Index, which tracks the number of fixed cranes on construction sites, is a simplified measure of the current pipeline of construction projects. Seattle witnessed an increase in the number of cranes on commercial projects, bringing the total crane count to 45 in the third quarter, with a slight uptick in the Capitol Hill area. Notably, 36 of these cranes were newly erected since the previous count six months ago.

Nationally, the Mortenson Quarterly Cost Index also reported relatively stable non-residential construction costs, with a modest increase of 0.19 percent in the third quarter of 2023. This is the smallest increase since the pre-pandemic era and may present opportunities for those looking to invest in specific markets.

Several Mortenson regional offices reported lower-than-average cost increases, further highlighting the overall trend across the industry. Minneapolis, Milwaukee, Portland, Chicago, and Phoenix all experienced marginal cost increases, with Denver even seeing a decrease in costs for the quarter. This suggests that the construction industry is adapting to the current economic conditions.

Labor costs, a significant component of construction expenses, increased by only 0.1 percent nationally during the third quarter. Subcontract work costs also edged up by 0.9 percent. While these increases are still present, they represent a considerable slowdown compared to the previous quarter, where labor costs were rising at a rate of 3.2 percent, and subcontract costs were tracking at +1.3 percent.

The Mortenson Cost Index indicates a single quarter increase of 0.3 percent nationally, while costs remained flat in Seattle. Over the last twelve months, costs increased by 2.3 percent nationally and 2.7 percent in Seattle.

However, the construction industry in Seattle is not without its challenges. Construction employment in the Seattle metro region saw a 1 percent increase, totaling 30,200 workers in September 2023 compared to the same month in 2022. While this is positive news for the region, the cost and availability of qualified workers continue to be ongoing challenges.

Price stabilization for commodity-based materials and stable availability and lead times offer some respite. Nevertheless, industry optimism remains cautious, primarily due to a decline in non-building construction activity and a 6 percent drop in construction starts in September, according to the Dodge Construction Network. This decline can be attributed to increased credit rates and tighter lending standards, which have deterred new construction projects. In addition, larger trends around the utilization of office buildings and a slower return-to-office activity likely also played a significant role in the lack of new project starts.

The AIA/Deltek Architecture Billing Index, often considered a forward-looking indicator of construction activity, also dipped into negative territory in September. This decline was led by reductions in multifamily and billings in the Western part of the US, signaling hesitancy among clients to commit to new projects.

Paradoxically, the lull in construction activity may benefit well-capitalized projects already in the design or preconstruction phase, especially if future market conditions provide better access to labor while costs remain stable. Although non-residential building starts decreased by 4 percent in September, they still remained 3 percent higher than in September 2022. The sector’s overall health is reflected in a seasonally adjusted annual rate of $459 billion.