In our Forecast report for the real estate market published in February of this year, we found that the expected increase in construction costs due to COVID-19 had not yet been observed on the market. Given the lack of startup projects, it was hard to predict how this would play out and our prediction was that this was definitely an area to watch. Fast forward four months to the complete reopening of the construction sites and it is clear that labor and material shortages are driving up construction costs. The question is whether these problems will solve themselves in the short term or are we facing bumpy times?
Concerns about material costs and labor shortages are not new. Before COVID-19, there was a lot of talk in the industry about the shortage of skilled workers and the lack of newcomers to training. Rising material, supply and financing costs were also seen as pressure points. COVID-19 has exacerbated the problem on both the demand and supply sides (i.e., a slowdown in material production and now an increase in pent-up demand). As for the workforce, the long history of site closures has resulted in skilled labor (already in short supply) leaving the market for lucrative jobs in the UK and beyond. The current travel restrictions are unlikely to facilitate a rush to return.
Brexit has made supply chain problems even more difficult, the effects of which may not become apparent for many months, especially if the Northern Ireland Protocol is threatened. Further afield, the blockade of the Suez Canal made headlines, but a bigger problem is a construction boom in the US affecting supplies. Ireland is not alone in these difficulties. The UK Construction Management Council warns of a shortage of many items, with wood, steel and plastics being the hardest hit.
Politically, construction costs have become entangled in the supply of housing, which has become an incredibly hot topic since the building was completely reopened a few weeks ago. In a recent interview, Housing Secretary Darragh O’Brien discussed the myriad of obstacles faced by a government trying to achieve 33,000 housing units a year – unsurprisingly, labor and materials play a large role.
Despite all this doom and gloom, industry analysts haven’t yet predicted these issues, which will result in a sharp spike in asking prices, although it may be too early to say. In its report, published March 31, 2021, Linesight predicts a 1.75-2.25% increase in tender inflation this year, which is somewhere between previous estimates by AECOM (2% projected increase in tender prices) and Mitchell McDermott (2.5 -3% increase in tender prices). January predicted.
More recently, Deloitte (Q1 Industry Review, published May 2021) has been analyzing construction costs and is forecasting a spike in construction cost inflation towards the end of the year and beyond, when the rising costs are fully realized and new projects become available – but don’t venture a figure . Elsewhere in the marketplace, the feeling is that the current material shortages are temporary and are unlikely to last into the second quarter of 2022. Hibernia REIT is a developer who realized concerns about the past 14 days of releasing its annual results, but predicts the issues will normalize within six to nine months.
Even if the current problems are short term, the underlying problems remain and there have been many calls for the government and other industry stakeholders to focus on increasing capacity and increasing efficiency to counter future shocks to the market strengthen. There are a number of opinions on how best to do this, but likely a successful strategy will require a multi-pronged approach, including incorporating construction technologies and off-site construction while increasing the workforce.
Minister O’Brien said the government is exploring ways in which precast, prefabrication and off-site construction can reduce costs. Although size is a factor, it can still be used in the private sector. BIM and other newer forms of construction technologies such as virtual reality, wearables, drones, artificial intelligence, and robotics are used in and for construction projects from time to time, but the industry has not yet seen sufficient proliferation of these technologies for the industry to function as a whole really start to reap the benefits.
A coordinated strategy is also likely to be needed to increase the availability of a skilled workforce, including the settlement of Irish workers and a re-focus on apprenticeship programs and academic qualifications. Longer-term solutions, such as the introduction of digital planning and construction into the curriculum, are required. The aim is to make a career in the Irish construction industry more attractive for school leavers, although this must be supported by the use of local technology. In short, our forecast has remained unchanged since February – this area is definitely to watch out for.