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Inflation is the dominant feature of our latest report about comparative construction costs across 100 global cities, International Construction Costs 2023. The high inflation and high interest rate environment that followed has created real viability challenges for owners and investors who want to improve the performance of their existing assets. There is a danger that these key decision makers wait for the impact to ride out before proceeding with asset upgrades, perceiving it to be a lower cost and lower risk approach.
But a ‘do nothing’ strategy has the potential to accelerate the rise of stranded assets – buildings at risk of becoming functionally obsolete due to new requirements to tackle climate change. Our latest International Construction Costs report suggests no regret actions that can be taken now to preserve asset value.
Inflation everywhere all at once
They say that death and taxes are the only two certainties in life. For those who have spent their careers in construction, you can probably add volatility to that list. That’s definitely been the case in the UK in recent years, with the sector having to deal with the fallout from the EU referendum, the Covid-19 pandemic and most recently, the Ukraine conflict.
In 2022, the key challenge was how to deal with inflation. Our latest International Construction Costs (ICC) Index, called New Horizons, found that historically high inflation affected 90% of the cities in our sample of 100 global locations. The situation was notably acute in Europe. Here, construction costs were particularly impacted by the invasion of Ukraine and the subsequent dramatic increases in energy costs. The resulting disruption to local manufacturing supply chains and regional-specific energy markets added 5-6% to the region’s inflation and led to most European cities, including those in the UK, experiencing construction inflation of between 10-20%.
Currency movement, driven mainly by an appreciating US dollar, was another important component in the final ICC rankings in 2023, as it was the previous year. This helps to explain why US cities have moved further up the rankings this year, with four now in the top 10, including New York (3rd) and San Francisco (4th), with Boston and Philadelphia as new entrants at nine and 10.
There is some good news, however; inflation is subsiding in 2023 across most of the markets that we survey.