HomeNewsletterLatest NewsletterSan Fran tops global list of most expensive cities to build

San Fran tops global list of most expensive cities to build

Increased demand, supply chain disruptions contribute to rising construction costs.

U.S. cities are currently some of the most expensive places in the world for real estate development, according to global professional services consultancy Turner & Townsend’s recent International Construction Market Survey (ICMS).

The report revealed record-setting cost escalation around the global real estate industry—the combination of increased demand and the “release of pent-up investment” has led to almost 31 percent of markets reporting construction inflation for 2022 of 10 percent more without a course correction or decreased costs expected soon.

Turner & Townsend annually produce global rankings of the average cost to build in each market. San Francisco topped the list in 2022 at $4,729 per square meter, according to the company. Tokyo ranked second, but four of the top 10 markets in the U.S.—aforementioned San Francisco, New York (fourth), Boston (eighth) and Los Angeles (ninth).

“We have seen a big shift in positioning for North American markets, which is primarily due to the strengthening of the USD, higher building material costs driven by supply-chain disruptions, and the region’s high labor costs,” Turner & Townsend said in a release.

“In San Francisco, construction demand is continuing to be led by increasing requirements for new mixed-use real estate from Google, Apple, Facebook and other tech companies throughout the Bay Area,” added John Robbins, Managing Director for the U.S. and North American Head of Real Estate, Turner & Townsend.

North American markets are heating up, labor shortages remain

 The ICMS also looks at market temperatures, which measure pressure on local supply chains based on volume of demand and tendering conditions. They’re also a reflection on an industry facing tough challenges. Almost 39 percent of markets surveyed were considered “hot” or “overheating”—where conditions are deemed at risk of acting as a brake on development. This is a significant increase from 2021, where joust 10 percent of markets were in either the “hot” or “overheating” categories. Meanwhile, the number of “cold” markets fell from six to just one.

In North America there were no “hot” or “overheating” markets last year and now there are seven—Austin, Houston, Phoenix, San Francisco, Montreal, Ottawa and Toronto.

Markets are still experiencing skilled labor shortages, however. Numbers were down prior to the COVID-19 pandemic but have fallen even more around the world since then. Almost 80 percent of markets were experiencing skilled labor shortages, according to Turner & Townsend’s 2022 survey, while 15.9 percent of markets were in balance and just 4.5 percent had a surplus in construction labor.

Competition for housing, retaining labor remains stiff

Robbins noted that housing demand in the San Francisco area remains at an all-time high. The combination of delayed projects due the pandemic and housing stock shortages had led to such increased demand. The development rate is especially high on the Peninsula and in San Jose as companies like Google provide residential buildings in an effort to meet the demand for affordable housing.

Meanwhile on the East Coast, New York is racing to meet the demand for new “supertall towers,” Robbins said. Additionally, New York City Mayor Eric Adams has promised to supercharge economic development by loosening zoning regulations while committing to new apartment building across the five boroughs. A focus on zero carbon is also leading an emerging retrofit market for existing buildings.

The Big Apple’s challenge in this quest is retaining construction labor. The city is competing with markets like Austin and Phoenix as well as rural areas in states such as Kentucky and Georgia that have seen an increase in new industrial development for battery factories and semiconductor plants, according to Robbins. Meanwhile, San Francisco remains reliant on workers from neighboring states to meet rising demand.

Biggest challenges, emerging markets

 Turner & Townsend asked its market experts, each located in different parts of the word, to rate the degree of impact that certain challenges were having on their local construction markets. The top three challenges reported were rising construction costs, excessive lead times and skilled labor shortages. These challenges are having a significant impact on construction worldwide and were a common theme when the company gauged local market sentiment from its regional experts.

The report also noted there were a few key sectors that were driving post-pandemic growth, as well as costs, across global real estate. The industrial, manufacturing and distribution space was the top performing sector, according to the survey, in part because of e-commerce growth and pharmaceuticals manufacturing.

Residential and social housing and transport (road, rail and ports) finished second and third, respectively.

“Housing has benefited from a period of historically low interest rates, though as central banks now act to curb inflation a softening in the market is expected,” the report said.

Meanwhile commercial office development had a significant jump—it finished 15th in 2021 and fifth this year, which could be an indicator that office space demand is on the rise following the pandemic.

The full Turner & Townsend International Construction Market Survey can be found here.

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