AFTER some building material prices soared by at least 40%, construction costs are expected to moderate in 2023 with residential projects tipped to rise by 8-10% and commercial construction by 6-8%.

According to the latest Napier & Blakeley Construction Costs Datacards, it has been challenging past 12 months for developers, builders, suppliers, sub-contractors alike.

Recently Johnny Woodhouse, State Director Victoria at MaxCap Group discussed in APJ’s Talking Property Podcast about rising construction costs and the impact on rise and fall contracts and traditional funding structures.

“With material costs for timber and steel experiencing general price rises of up to 40% and 50% respectively, with some specific price rises being well above those, all market participants have been struggling to keep ahead of the constant changes, which unfortunately has seen some builders and sub-contractors not survive,” N&B director Craig Smith said.

The latest data follow reports of rising number of building companies collapsing, the most high profile were Probuild and Condev earlier this year. This week Victorian builder Langford Jones Homes went into liquidation owing 250 creditors more than $10 million. It is the fourth building company collapse within the week.

Residential construction costs

N&B Construction Costs Datacards sourced from approximately 600 projects the company advised on last year shows Sydney is the most expensive city for a single home of up 250 sqm, costing between $1,375 and $2,200 per sqm, followed by Melbourne, Perth and Adelaide costing $1,600 to $1,900 per sqm, and South East Queensland $1,120 to $1,730 per sqm.

For high standard multi-storey apartments, Sydney again was the most expensive at $3,700 to $6,000 per sqm; followed by SEQ $3,060 to $4,360 per sqm; Melbourne $3,800 to $4,000 per sqm; Adelaide $3,600 to $4,000 per sqm; Perth $3,100 to $4,000 per sqm.

For high standard two-storey townhouse projects, Sydney cost $2,200 to $3,300 per sqm; Perth and Melbourne $2,200 to $2,800 per sqm; Adelaide $2,000 to $2,750 per sqm and SEQ $2,030 to $2,700 per sqm.

Office construction costs

N&B data shows the cost of a premium grade office of over 20-storey in Sydney was sky high, at $4,800 to $7,000 per sqm; outstripping Melbourne with $3,600 to $4,200 per sqm.

SEQ cost $4,490 to $5,640 per sqm; Perth $3,900 to $5,000 per sqm and Adelaide was $3,350 to $4,000.

Retail construction costs

Sydney and SEQ were the most expensive to deliver a medium standard suburban shopping centre costing $2,150 to $3,100 per sqm and $1,990 to $3,100 per sqm respectively; followed by Perth and Melbourne $2,200 to $2,500 per sqm; and Adelaide $2,000 to $2,350 per sqm.

Industrial construction costs

In the hot industrial market, rising land values and site availability are not the only concerns. Construction for warehouses of over 3,000 sqm has risen as $890 to $1,175 sqm in Sydney; Adelaide was $630 to $800 per sqm; Perth $700 to $880 per sqm; Melbourne $650 to $820 per sqm; and SEQ $750 to $1,040 per sqm.

Hotel construction costs

Meanwhile fitout for 5 star hotel was most expensive in SEQ costing between $82,800 to $120,000 per room whilst construction of a 5-star hotel ranged from $4,720 to $6,020. Sydney costs varied widely with fitout from $65,000 and $118,000 per room and construction starting $4,925 to $6,950 per sqm.

Melbourne, Perth and Adelaide costs were lower, with 5-star fitouts ranging from $60,000 to $80,000 per room and construction ranging from $4,500 to $5,400 per sqm.

Download the N&B Construction Costs Datacards sector-by-sector and city-by-city for Sydney; Melbourne; SEQ; Adelaide; and Perth.

CBRE research director Kate Bailey said price escalations should peak this year and moderate in 2023.

“While a sharp increase in construction costs is putting pressure on Australia’s development pipeline, margins and timelines, most cost escalations have now been built into project pricing, particularly for building materials, and further price increases will be more modest. While supply chain delays will persist, improvements are expected in early 2023 with cost increases from next year onwards to be largely driven by higher wage costs.” Bailey said.

CBRE’s report highlights that Australian price increases have been recorded across all key material and staffing indicators in the past 12 months, with the cost of structural steel increasing the most (+39.5% per tonne) followed by plasterboard (+35.3% per sqm). The cost of labour also spiked, with the average cost of a site foreman increasing by 11.5% per hour.

Perth and Brisbane are expected to experience the greatest year-on-year state construction cost increases in 2022, of 7% and 6% respectively.

Although factors such as global supply chain, recovery from COVID-19, shipping costs, interest rates, inflation, the geopolitical climate and energy crisis, labour shortages will remain in 2023, N&B’s Smith said with regard to the significant price increases in timber and steel, the firm believes the worst is over.

“We still expect some upward pressure on costs to continue in the short to medium term, with the market taking some time to assess that the rate of future price increases of significance are over or at least reduced,” he added.

“In summary, our general current cost escalation forecast for the 2022/2023 financial year is 8-10% for residential type construction (relating to timber framed buildings) and 6-8% for commercial construction. Of course… the project type and location will affect these expectations.” said Smith.

Meanwhile the latest International Construction Market Survey (ICMS) of 88 cities released by Turner & Townsend this week shows Australia has become the fourth most expensive region for construction labour globally, reaching an average of USD$75.5 per hour. Switzerland (USD$118.1) is the most expensive followed by Austria (USD$77.7) and the USA is placed third (USD$77.1).

However ICMS predicts the average construction cost inflation will fall from 8% this year to 5.5% next year – the lowest forecast rate for any global area.

Ranked at 36, Perth has become the most expensive market in Australia to build with an average cost of $2,822 per sqm, followed by Sydney (42) at $2,699 per sqm, Melbourne (44) is $2,666 per sqm, Brisbane (46) sits at $2,620.7 per sqm and Adelaide (50) is priced at $2,454.4 per sqm.

Globally, US cities dominate the rankings. San Francisco has become the most expensive city in the world in which to build with an average cost of $4,729 per sqm. The US accounts for four of the top ten most expensive markets, and nine of the top twenty. Japan and Switzerland also feature prominently. Tokyo ($4,665 per sqm) and Osaka ($4,559 per sqm) place second and third respectively with New York in fourth ($4,517 per sqm). Geneva ($4,332 per sqm) and Zurich ($4,286 per sqm) sit at fifth and sixth.

Turner & Townsend ANZ and Asia managing director Anooj Oodit said all markets in Australia are expected to get warmer over the next 12 months. Brisbane and Perth markets are currently hot, while Sydney, Melbourne and Adelaide are warm. Skills shortages, construction cost inflation and long lead times are some of the biggest challenges facing Australia’s construction market.

Market ‘temperatures’ – which measure pressure on local supply chains based on volume of demand and tendering conditions – also reflect an industry facing tough challenges. 38.6% of markets surveyed were classified as ‘hot’ or ‘overheating’ – where conditions are deemed at risk of acting as a brake on development. This is up from just 10.0% in 2021, while the number of ‘cold’ markets fell from six to only one.

Oodit said material shortages are also lengthening the anticipated project durations and increasing costs.

“A heated local market is exacerbated by strain on tier 1 and tier 2 builders due to COVID-19 and other financial pressures, which has led to less competitive market conditions.

“Rising material costs are postponing some projects as recent tender returns reflect higher steel and concrete prices, challenging the feasibility of both current and projects at the design stage.” Oodit said.

Despite the challenges for the construction industry, MaxCap’s Woodhouse said the rapid emergence of Roberts Co following the collapse of Probuild, shows market fundamentals still stack up.

Written by Nelson Nap
Australian Property Journal
5 July 2022