Construction costs escalating as labour shortages increase: JLL Outlook

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Ontario Construction News staff writer

The Fourth Quarter Canadian Construction Outlook published by Jones Lang LaSalle (JLL) provides some numbers to back up up on-the-ground experience: Ontario’s construction costs (especially in Ottawa and Toronto) are escalating as labour shortages become more severe in the COVID-19 era.

Canada finds itself in a historic building boom, but this activity has created a spike in demand for building materials at a time when global supply chains are struggling to keep up,” the real estate services company says.

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Cost pressures are, not surprisingly, highest in the most intensely active markets, led by Ottawa, which has seen a 22.2% increase in the past three years. Toronto ranks third (after Montreal) with an 18.4% increase. These numbers compare to the national average of 13.3%.

Since the third quarter of 2019, commodity prices have risen by 27% for aluminum, 55% for copper and an incredible 113% for steel. Steel, lumber and copper are the three most volatile sectors; however there has been significant price relief (after an earlier spike) for lumber.

Part of the problem relates to supply chain issues. JLL says the cost of a 40-ton shipping container to cross the Pacific Ocean from China/East Asia has quadrupled from $4,500 a year ago to more than $21,000. Containers are taking 73 days compared to 20 to 30 days pre-pandemic to cross the ocean.

Labour shortages are also presenting challenges.

“Demand for construction services have generated extremely favourable conditions for workers,” JLL says.

“As of Q3, Statistics Canada reported a job vacancy rate of 5.8% in the construction sector.  This is one of the highest rates of any area in the economy and well above the 4.6% job vacancy rate for Canada as a whole.

“Complicating matters for the construction industry is the older demographic profile of the workforce. During the pandemic many of the older workers decided to retire early or transition to a different career path and more workers are leaving than those who are entering.”

JLL says that the cost pressures are highest in the residential sector, with project costs soaring 20% year-over-year, while non-residential construction costs have risen 8%. There was a record new building permit volume in 2021.

JLL says the outlook about “whether these price fluctuations normalize is the subject of great debate.”

“It is possible that some volatility will be with us for some time, “ JLL says. “Governments are increasingly intent on transitioning to a clearer energy grid, and we are seeing the effects of this now with fast-rising natural gas, oil, and coal prices that could hit consumers hard this winter as energy demand peaks. At the same time there is greater geopolitical uncertainty, and supply chain managers must price in those risks as well.”

“That all said, there are reasons to believe that relief will come to supply chains over the next year.  Much of the volatility we are seeing is a consequence of supply chain operators transitioning fro a low demand context to a high demand context in a short period of time as consumers binge on goods and services after a year of lockdown measures.

“By 2022 this is expected to largely stabilize, resulting in more normal price variations,” JLL says.

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