Over the past 12 months, (bid) construction costs jumped by 7.42 percent in North America, according to Rider Levett Bucknall‘s construction cost report for the fourth quarter of 2021. Those cost increases are reminiscent of the ones the industry saw at the start of the global financial crisis in 2007, RLB stated.

Among the 12 cities the report tracks, full-year increases ranged from 4.1 percent in Honolulu and 4.43 percent in Denver to 9.11 percent in Washington, D.C., and 10.09 percent in Seattle.

“It can be argued that some of the increase in 2021 may simply be catching up on the low rate of increase in 2020, but it is more likely a reaction to the combination of the labor shortages and supply chain issues that the industry has encountered,” stated Julian Anderson, president of Rider Levett Bucknall North America.

“In my opinion, while 2022 should be less frenetic than 2020 and 2021,” he added, “it is unlikely that we will see any relief from the current high rate of cost increases until some of the heat goes out of the economy.”

Market highlights

• RLB reports that from July 1, 2021 to October 1, 2021, the U.S. national average increase in construction costs was approximately 1.50 percent (7.42 percent annualized)
• Seattle (5 percent), Boston (2.66 percent), Chicago (2.28 percent), San Francisco (1.99 percent) and New York (1.92 percent) saw cost increases above the national average during the fourth quarter
• Los Angeles (1.39 percent), Las Vegas (1.35 percent), Denver (1.34 percent), Portland (1.33 percent), Phoenix (1.21 percent), Honolulu (0.94 percent) and Washington, D.C. (0.37 percent) saw cost increases below the national average during the fourth quarter

Key fiscal barometers

• The U.S. Consumer Price Index (CPI) showed a year-over-year increase of 5.38 percent
• The U.S. gross domestic product (GDP) increased at an annual rate of 2.1 percent in the third quarter of 2021, following a rate of 6.7 percent in the second quarter

• In October, the Architecture Billings Index (ABI) dipped to 54.3 from 56.6 in September

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Portland’s crane count dropped nearly 35 percent this year to its lowest level since 2015, according to a new report.

Construction cranes in Portland’s skies fell from 23 in February to 15 in August. Crane counts, conducted twice annually by Rider Levett Bucknall, serve as a barometer of activity on major projects.

Several major projects – such as Adidas‘ expansion of its North American headquarters – have wrapped up. At the same time, developers and investors are largely sitting on the sidelines as the coronavirus pandemic, escalating construction costs and skilled labor shortages have interrupted normal business operations.

Portland’s number of cranes in August was the lowest since July 2015, when only 14 cranes dotted the city’s skies.

“As several large commercial and mixed-use projects have wrapped up, the Portland crane count has seen a substantial decrease,” RLB stated in its October report. “Large new projects that will require cranes (PDX T-Core and numerous transit projects) have not yet begun construction. The majority of new projects are mixed-use and residential properties that are located in the Northwest and downtown.”

Chris Nelson, co-founder of Portland developer Capstone Partners, said the pandemic has dented demand in three key sectors: office, multifamily and hospitality.

“I’d say all three of those categories were probably a little oversupplied before COVID,” he said. “That’s not a recipe for multistory new starts unless there are unusual circumstances.”

Nelson said he expects Portland’s crane count to continue to decline before recovering.

“The market I think just needs to burn off the supply that was delivered the last few years, and rents need to bounce back up to a level where it makes sense” to build new projects, he said.

Multifamily is already showing signs of recovery, with strong rent growth in some neighborhoods. The office sector may take longer to recover, Nelson said. Some companies, including Lululemon, On and Boggs Footwear, have recently signed leases, and others are rumored to be searching for space. Yet leasing activity overall has been very slow.

“It’s not a great time to be an office landlord, that’s for sure,” Nelson said.

Portland was far from alone in seeing a decline in cranes. Across 14 North American cities surveyed by RLB, cranes fell 4.5 percent.

Toronto had by far the most cranes in North America, with 225. Los Angeles was second, with 51. Among other Western cities, Seattle had 39 cranes, Denver had 15 and San Francisco had 13. Phoenix and Las Vegas had two each.

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Are the AEC industries in recovery or a transition?

That’s the question raised by RLB’s North American Quarterly Construction Cost report for the second quarter of 2021.

Despite persistent headwinds, encouraging trends are beginning to emerge. To start, the Architectural Billings Index was above the 50 mark for the first time since Q4 2019. It went from 30.2 to a “robust” 57.9 from April 2020 to April 2021. Any number over 50 is considered a positive outlook.

Gross Domestic Product increased by 6.4 percent in the first quarter of 2021 compared to the same period a year ago. And RLB’s Construction Cost Index, at 218.06 for the first quarter in 2021, was 4.6 percent above the same quarter in 2021. In April, the construction industry was valued at 1.5424.2 billion by the U.S. Department of Commerce, which is 9.8 percent above the year before (1.387.9 in April 2020).

Still, concerns and questions linger over the industry. Supply-chain bottlenecks, volatile commodity prices, delayed permitting processes and materials prices are hamstringing the industry, as well as the ongoing skilled labor shortage. Construction unemployment across the nation, while down in the first quarter, was still 8.6 percent — making projects more costly and slower to build.

According to RLB’s report, among the most critical choices facing contractors will be to identify which building sectors to target. In Portland, a closer look at construction costs per square foot found that hospitals, universities and high school education led the pack with the highest costs.

Portland also experienced construction cost increases above the national average during Q1 of 2021.

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Portland’s crane count slipped to 28 during the first quarter of the year, according to Rider Levett Bucknall.

That was down from 30 during the previous biannual crane count in July 2019.

Among other West Coast cities, Seattle had 36 fixed-tower cranes in the air, San Francisco had 33 and Los Angeles had 47 – the most in the United States. Elsewhere in the West, Denver had 25 cranes, Las Vegas had 17 and Phoenix had nine.

The crane count is monitored as an indicator of economic activity, and specifically large construction projects.

Toronto had by far the most cranes in North America, with 121.

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International property and construction consultancy Rider Levett Bucknall recently released its latest for North America, and it suggests an impending slowdown for the industry.

The report for the third quarter shows the Construction Industry Confidence Index (CICI) is 51, a drop of seven points from the second quarter of 2019 and a drop of 19 points year-over-year. That figure is precariously close to the 50-point mark, which is widely considered the threshold for negative sentiment about industry growth, according to the report.

“While it is expected that construction will face a downturn in the next year or so, this doesn’t necessarily mean that the construction market is in trouble,” Rider Levett Bucknall stated in the report. “It does mean a slowdown over the next 12-18 months, which may seem like a recession after the frantic pace of the last few years.”

The national average increase in construction costs for the third quarter was approximately 1.3 percent. San Francisco (1.87 percent), Honolulu (1.66), Chicago (1.65) and Seattle (1.57) had cost increases above the national average for the third quarter. Portland’s increase was 1.07 percent.

Meanwhile, construction unemployment for the second quarter (the most recent with numbers available) of 2019 fell to 4 percent from 5.2 percent in the first quarter.

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Multifamily brokers are tracking a downturn in sales volume in the Portland-metro area to see if it’s merely a dip from the historic highs of last year, or the portentous start of a more serious downturn.

Multifamily sales volume in the city of Portland fell 14.7 percent for the year through May to $82.3 million, according to RMLS, a listing service. In the wider, five-county Portland-metro area, sales were down 9.7 percent to $123.5 million.

“There seems to be a little bit of a slowdown,” said Greg Frick, a partner at HFO Investment Real Estate.

The multifamily landscape has changed dramatically in the past year. Regulatory changes in Portland and statewide have brought rent caps and tenant protections that limit evictions. Also, state legislators passed a bill that enables developers to build duplexes, triplexes and other middle housing types throughout residential zones in Oregon cities.

Meanwhile, thousands of multifamily units have come to market. Some leasing agents have offered concessions such as a month’s free rent for new tenants to help stabilize the properties.

Rents have flatlined. June marked the third consecutive month of declining average rents in Portland, according to Apartment List. Rents slipped 0.1 percent from May, but were still up 0.4 percent compared to a year previous.

In contrast, the nine other Oregon cities tracked by Apartment List saw rent increases.

Investors may be reacting to a flood of similar apartment buildings on the market, brokers said.

“Right now, probably the toughest thing to move is new construction under 60 to 70 units in the city of Portland,” said Steve Morris, principal broker at SMI Commercial Real Estate. “There’s just a lot of that out there.”

Meanwhile, rents and corresponding multifamily sale prices have grown so much in recent years that there’s a sense there isn’t much room for growth remaining in this economic cycle.

“Portland pricing has come pretty far, pretty fast, and people are wondering what the upside is going to be,” Morris said.

Portland should see more sales as new buildings stabilize, or reach nearly full occupancy, Frick said. The first quarter tends to be slow, and newly opened buildings will push some sales into fall or winter as tenants move in and make the buildings attractive to buyers, he said.

“I think we’ll see velocity pick up,” he said.

Tertiary markets outside of the metro area, including Salem and Corvallis, are doing well, brokers said. Camas, Washington, had the metro area’s largest multifamily sale in the first quarter, with Trio Pointe, a 240-unit building, going to Goldman Sachs for $58 million, or $232 per square foot, according to Rider Levett Bucknall.

Regulations have changed the formula for some multifamily investments. Gov. Kate Brown in February signed a bill that caps rent increases at 7 percent plus inflation annually. The law has an exception for buildings younger than 15 years old. That has made flips of older multifamily properties less attractive for investors, brokers said.

Still, investors have money to spend for the right opportunity.

“On the investment side, there’s still a lot of capital looking for yield,” Frick said.

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Rents in Portland have fallen for consecutive months, suggesting new supply is making a dent in meeting the city’s housing needs.

In October, rents here were 0.4 percent lower than a year earlier, and 0.8 percent lower than September, according to Apartment List. The new data indicate rental housing costs have crested after strong increases in recent years.

The median rent was $1,140 for a one-bedroom apartment, and $1,350 for a two-bedroom apartment, according to the rental website. October was the second month in a row rents declined in Portland. The city’s decline was steeper than the nation’s, where rents slipped 0.1 percent.

“Demand is weak, relative to the supply,” said Sam Rodriguez, senior managing director of Mill Creek Residential Trust, a major multifamily developer in Portland. “That’s why you’re seeing this very anemic growth compared to the growth we had before.”

Other data also indicates rents are retreating. At Hassalo on Eighth, a Lloyd District development with 657 apartments, rents were $1,671 as of Sept. 30, down 4 percent from $1,735 a year earlier. (Hassalo on Eighth is owned by American Assets Trust, a publicly traded company).

Managers of some rental properties are offering concessions, particularly in the luxury market. At Yard, for example, prospective renters are being offered a month free and a free gym membership. A month free is being offered for some units at Slate. Up to six weeks free is being offered at NV in the north Pearl District.

But the decrease in rents for luxury units has not trickled down for middle-income renters, said Jamey Duhamel, policy director for city Commissioner Chloe Eudaly.

“It’s softening at the high end,” Duhamel said. “That has not in any way translated to lower rents for folks who are stretched thin, or even the average renter.

“We definitely don’t see any slowdown in the need,” she added.

Nevertheless, supply in certain markets, including the Pearl District and Central Eastside, has surged as major apartment projects have opened.

“As developers, this is what we normally do – we overbuild,” Rodriguez said. “That puts a lid on rents for a while.”

Construction has continued apace. Portland’s crane count stood at 32 in July – more than New York, which had 18, according to Rider Levett Bucknall, a firm that tracks the data. Seattle had the most cranes, with 58.

The city of Portland has responded to a tight rental market with a slew of housing regulations. Inclusionary housing rules took effect Feb. 1, requiring developers of projects with 20 units or more to provide a portion of affordable units, or pay a hefty fee. Portland also instituted relocation assistance, requiring landlords to compensate tenants when issuing no-cause evictions or raising rent by 10 percent or more.

Developers responded to inclusionary housing by rushing to apply for projects before the rules took effect. Some of those projects are now under construction, while others are stalled.

“We’ve got a very, very large pipeline,” Rodriguez said. “I’m not sure how much of that is going to get done. A lot of it is in design review.”

Rodriguez is a member of the Portland Design Commission, which performs design review. Multifamily developers are grappling with inclusionary housing, which dents their revenue, he said.

“Everybody’s trying to figure out inclusionary housing,” he said. “We’re struggling to make deals work.”

Rodriguez predicted rents will again grow in about a year as the current supply is absorbed and few additional apartments get built.

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