Home AEC Report: Non-Residential Construction in Portland Faces Mixed Outlook

Report: Non-Residential Construction in Portland Faces Mixed Outlook

Portland, Mortenson, Mortenson Quarterly Cost Index, Seattle, Dodge Construction Network, AIA/Deltek Architecture Billing Index
Courtesy of Ümit Yıldırım

By The Registry Staff

The non-residential construction sector in Portland faces a mixed outlook in the third quarter of 2023. According to a recently released report by Mortenson, the region has been contending with elevated interest rates amidst stabilized costs, and notably, material availability and lead times have largely steadied, providing some relief from inflation that had persisted due to the global supply chain crisis and the impact of the COVID-19 pandemic.

On a national scale, the Mortenson Quarterly Cost Index indicates minimal movement in nonresidential construction costs during the third quarter, with a mere 0.19 percent increase. This modest uptick, the smallest since pre-pandemic conditions, may present opportunities for market-specific development, despite ongoing challenges related to labor availability, according to the report.

Regional offices of Mortenson reporting cost increases this quarter experienced below-average gains, with minimal upticks in Seattle at +0.02 percent and Portland at +0.25 percent as well as a number of other cities throughout the United States. In the Portland market, relatively stable material costs were counterbalanced by labor rates, influenced by pre-negotiated increases for the quarter.

The Mortenson Cost Index reveals a quarter-on-quarter increase in construction costs of 0.2 percent at the national level and 0.3 percent in Portland. Looking at the past twelve months, costs have risen by 2.3 percent across the country and 0.8 percent specifically in Portland. As of September 2023, nonresidential construction employment in the Portland metro region stood at 8,900, marking a notable 6 percent surge (or 500 workers) compared to the same month in 2022. However, the industry continues to grapple with the persistent challenge of securing qualified workers, impacting both cost and availability.

Nationwide, labor costs saw a marginal increase of only 0.1 percent, following collective bargaining agreements that had driven up costs in the previous quarter, according to the report. Subcontract work costs showed a modest uptick at 0.9 percent, signaling a notable deceleration in the pace of cost increases that had previously hindered broader improvements in material costs. To provide context, labor cost increases in the second quarter of 2023 were at 3.2 percent, while subcontract costs were tracking at +1.3 percent.

Despite the stabilization of costs, the construction industry’s outlook is characterized by cautious optimism, especially with a decline in non-building construction activity contributing to an overall decrease in construction starts. The Dodge Construction Network reported a 6 percent decline in construction starts in September, attributing it to increased credit rates and stricter lending standards. Year-to-date starts have remained flat compared to 2022.

The AIA/Deltek Architecture Billing Index, often seen as a forward-looking indicator spanning nine to twelve months, dipped into negative territory in September. This decline, particularly in multifamily and Western US billings, reflects a reluctance among clients to commit to new projects, according to the report.

The current lull in construction activity could be advantageous for well-capitalized projects in design or pre-construction phases, especially if future market conditions offer improved access to labor while costs remain steady, according to the report. Although nonresidential building starts, tracked by the Dodge Construction Network, decreased by 4 percent in September, they were still 3 percent higher than in September 2022. The sector maintains health with a seasonally adjusted annual rate of $459 billion.