Heat is coming out of many markets, but opportunities are emerging for others. Advanced economies are experiencing the most cooling, driven by challenging market conditions and tougher financial conditions. Emerging and developing economies have the biggest growth potential with Africa, Asia and the Middle East all expected to see vibrant activity.
By measuring market temperatures and tendering conditions, we can start to gain insights into the volume of construction activity in each local market. This also enables a view on likely cost pressures being experienced and allows us to isolate issues ahead to a time where markets might transition into different stages of development.
Typically, markets where tendering conditions are considered cold or lukewarm experience high competition between contractors for work, which results in greater commercial tension. On the contrary, hot or overheating tendering conditions tend to indicate markets with healthy project pipelines, meaning there is less competition for work, and consequently higher prices.
By this measure, we find that overall construction activity is softening. Just 23 of the 89 markets in our 2023 survey report tendering activity as either “hot” or “overheating”. When compared to last year, that’s close to a reduction by a third. Only two markets are ranked as overheating, Ottawa in Canada and Riyadh in Saudi Arabia, boosted by strong pipelines of work and localised supply chains, straining under robust activity levels.
Source: Turner & Townsend International construction market survey 2023
Markets aren’t necessarily becoming frostier overnight, however, with the proportion of locations referenced as “cold”, or “lukewarm” increasing marginally by 4.5 percent. Outliers are Gaborone, Ho Chi Minh City and Santiago which are recorded as “cold” and appear hamstrung by shallower order books.
What is more apparent is many markets transitioning down to “warm” tendering conditions from “hot” and “overheating” environments. Following pent-up demand petering out after COVID-19, and geopolitical tensions rising, heat has come out of many markets, notching the proportion of “warm” markets up by 12.0 percentage points.
Not all regions are experiencing similar tendering conditions, though. Australia and New Zealand, the Middle East and North America, and have a good degree of markets with heated temperatures.
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Figure 14:
Regional construction tendering conditions
Source: Turner & Townsend International construction market survey 2023
A detailed look at these markets reveals a common theme of state intervention. In Australia, activity has been boosted by state government elections last year, reinforcing public expenditure pipelines in unison with continued capacity constraints – effectively bolstering competition. Saudi Arabia has embarked on a transformative period in its development in the name of nation-building, with extensive social reforms, improving oil prices and continued investment from the Public Investment Fund facilitating growth. Meanwhile, many markets in the USA are benefitting from federal intervention to stimulate investment in the technology, high-tech manufacturing, and general manufacturing sectors, which has kept markets active.
On the other hand, Africa, Asia and South America look to have caught a chill. The construction industry in Botswana has been very sluggish since 2021, contractors have little work to do and there is usually stiff competition for the few tenders available. Regardless of falling demand, costs have risen in Nigeria which is import-reliant and has been adversely affected by conflict in Ukraine. Stringent COVID-19 policies – while now alleviating – have restricted activity in China, pushing up competition and political instability has accelerated slowdowns in South America.
In the UK, tendering settings are moderate. Even though several markets have transitioned downwards, the impact of increased insolvency and lower appetite to risk in supply chains is impacting tendering conditions. This is likely to keep competition low and pricing elevated while demand is restrained and expectations are muted.
Within regions, we find examples of multi-speed recoveries and changeable economic development. While the European Union has sought to act in concert to offset rising energy prices, we still find escalating prices in Warsaw that make it difficult to plan execution costs and get projects commissioned, leading to demand falling sooner and competition to drop. Western Europe, by comparison, is holding up better. Milan is a particularly strong example, enhanced by data centre activity and hotel construction improving, with notable lead times for materials and equipment adding to hot tendering conditions.
Those mixed messages relating to tendering conditions are also flowing through into the outlook for construction, globally. Twelve more markets are set to become “cooler” – increasing its proportion by 13.4 percentage points – when compared to last year’s survey and there are 31 fewer markets set to get “warmer”. This reinforces the position that many markets are coming off the boil and the industry outlook for 2023 is less optimistic.
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Figure 15:
Regional construction market outlook
Source: Turner & Townsend International construction market survey 2023
At first glance, this looks troublesome, but taking heat out of a market can be beneficial rather than simply a sign of weakness. Markets that are cooling tend to be those that already possess heated tendering conditions. Out of the 15 markets that are cooling from hotter conditions, ten are potentially transitioning from “warm” to “lukewarm”.
In North America, Los Angeles and San Francisco are expected cool and may see new projects held amidst growing uncertainty in the dominant technology and banking sectors. A cluster of countries in Europe may reduce too – Germany and Austria – as persistent volatility drags on investment. On the other hand, lower activity levels will certainly help to alleviate labour pressures and reduce lead times and project delays.
The overall trend may be toward softening, but examples of markets heating up also abound, most obviously in developing nations. Despite global headwinds, 77.8 percent of African markets should get “warmer”. Zimbabwe and Kenya are countries set to benefit from an increase in public spending on infrastructure, housing and energy. India is one of the fastest-growing economies in the world and construction activity is in a strong upswing across all markets, driven by robust private and public investment.
Growth is not isolated to emerging and developing markets, though. Brisbane, as an example, is expected to warm further over the next 12 months and beyond, accelerating green infrastructure projects in the lead-up to the 2032 Olympic Games.
Nonetheless, the expectation for most advanced markets is that cooling is now underway while emerging and developing markets are largely expected to get warmer. Many of these regions should weather the global economic slowdown of 2023, and for some, their economic growth is forecast to exceed global growth.
This can make these markets attractive opportunities for investors, particularly in regions where labour is cheaper and more available. However, these opportunities need to be weighed up against potential risks, including around the quality and safety of output. Clients are advised to take precautions to put in place strong governance and project controls to ensure they can operate in confidence.
Construction cost inflation - cost growth to slow but not go backwards
Peak construction cost escalation may have passed, but costs are likely to remain high, considerably impacting projects and programmes the world over, irrespective of demand conditions.
In this year’s survey, each of our experts have provided their views on how much construction costs increased or decreased in their market in 2022, as well as what inflation they are anticipating over 2023 and 2024.
On average, globally, our data suggests that construction inflation increased by 9.5 percent in 2022, albeit several regions and markets were positioned comfortably above that. Europe, experiencing greater ramifications from conflict in Ukraine and the fallout of political sanctions on Russia, averaged 12.7 percent. While average growth in South America was 11.9 percent and 10.9 percent in Africa – both suffering from greater currency swings and expensive importation. Individually, Lagos, Santiago and Munich rounded out the top three spots, posting growth of 25.0, 20.5 and 20.0 percent, respectively.
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Source: Turner & Townsend International construction market survey 2023
In 2023, the average estimated growth in global construction costs is recorded as 5.8 percent. This confirms the trend set in our 2022 report – disinflation – but with a key difference: inflation is stubborn and isn’t going anywhere fast. Markets such as Harare, Mexico City and Bogota are all projected to increase by 10.0 percent, pulling the overall average up, although this abnormal escalation is set to wane next year.
The lows are perhaps even more telling and no deflation is expected in 2023. Regionally, the United Kingdom, Australia and New Zealand, and Asia lead the way with the weakest paces of growth, anticipating 3.6, 4.1 and 4.7 percent, respectively. This is true even with each market suffering from low labour availability following Brexit constraints, strict border closures and general COVID-19 restrictions.
Even the softest market – Belfast – may see inflation potentially increase by 2.0 percent in 2023 despite political uncertainty and falling construction output growth. This reinforces the pattern seen in recent years of costs not being predominantly driven by workloads. Remnants of a once fractured supply chain, persistent market volatility and a war for talent continue to stifle the global construction industry, contributing heavily to inflationary pressures.
Looking further ahead, and into 2024, construction cost inflation is forecasted to grow by 4.3 percent on average, globally. Emerging and developing economies steer the global inflation allowance upwards again, helped by strong pipelines of work in numerous markets. As an example, inflation is expected to rise by 6.0 percent in Jakarta during 2024 as resources are depleted to create a new Indonesian capital.
Predictions for North America come in below the global average but possess the highest rate of inflation out of the advanced markets surveyed, potentially rising by 4.1 percent in 2024. Ottawa, in Canada, is stubbornly high at 7.5 percent, and the growth of secondary cities in the United States may prompt additional development as they catch up with established market hotspots such as New York and San Francisco.
Nonetheless, escalation is reducing. Fluctuations with input costs should lessen, activity levels might drop further and confidence may shallow out, combining to strengthen the correlation between market temperature and construction cost inflation. While this creates a chance for that relationship to recalibrate, there are other considerations to note.
There is a complex interplay of factors at play, combining uniquely at global, regional and local levels to define costs. Even markets with reduced workloads must contend with elevated interest rates, reduced cash flows and costlier credit which will likely see to a rise in contractor insolvencies. Persistent skills shortages, which cannot be fixed overnight, also contribute and bring a degree of stickiness to escalation, potentially putting a floor under industry pricing.
Of course, there are risks to this outlook and forecasts may be above, or below, what have been set out in our findings. As we have seen in recent years, markets have become increasingly volatile and sensitive to headwinds. Further worsening of geopolitical tensions is a big risk, which could prompt further strong construction cost inflation, depending on the circumstances.
International ranking – where are the most expensive markets?
Buoyant demand and rampant inflation during 2022 contribute to see the overall costs of construction accelerate. The gap between advanced economies and emerging and developing economies is widening, with North American markets – particularly the United States – firmly at the top of our cost leader board.
Our 2023 global construction market survey finds that New York City has come in as the most expensive market to build, with an average build cost of US$5,451 per sqm. This is closely followed by San Francisco at US$5,200 per sqm and makes these the only two markets where the average cost to build exceeds US$5,000 per sqm.
In our 2022 survey, San Francisco was the most expensive market to build, while New York was ranked fourth. While the two markets are closely pegged, the relative position reflects the strength of New York’s rebound from COVID-19 and the ongoing appeal of the ‘Big Apple’ as a target for investment in a range of sectors from corporate occupier to life sciences.
The strength of the US within our 2023 survey is hard to dismiss, with Boston (seventh), Los Angeles (eighth), Chicago (ninth) and Seattle (tenth) joining New York and San Francisco in the top 10. The strength of the USD has played a part in propelling these well-established markets to overall dominance in our rankings.
However, the story does not stop there, with several secondary US markets also seeing soaring costs, including Atlanta, Tampa, Phoenix, Nashville and Austin. This cannot be so easily explained simply by currency movement but reflects an energetic market with strong competition for labour and materials. Key economic stimulus packages are playing an important role in these trends as the Biden administration targets a range of measures at rejuvenating the US economy post COVID-19.
Our remaining top 10 markets are more consistent, with Geneva and Zurich placed third and fourth in 2023, moving up from fifth and sixth position in 2022. In Asia, Tokyo and Osaka have moved into fifth and sixth place in 2023, down from second and third spots last year.
Notable for their absence are two previous mainstays in our top rankings – Hong Kong, which has moved from seventh in 2022 to eleventh in 2023 – and London, which has dropped from tenth to fourteenth. These moves are partly attributable to the comparable rise of US cities, rather than necessarily a softening of their own market conditions: both of these major global hubs have seen consistent cost escalation through the year.
Going for green – how Biden’s economic stimulus is playing out in our survey
The dominant position of US cities within our 2023 rankings reflects the strength of the USD compared to many other key currencies. However, the position of secondary markets has also been bolstered by a series of economic stimulus packages designed to ‘build back better’ from the global pandemic.
The landmark bipartisan Infrastructure Investment and Jobs Act – passed in 2021 – marked a renewal moment in recent US political history, unleashing US$91.2bn in federal funding to repair and reinvigorate ageing transport infrastructure.
This was followed in 2022 by the Inflation Reduction Act, which is designed to stimulate a range of sectors associated with the decarbonisation agenda – from advanced battery cell and hydrogen manufacturing to retrofitting existing real estate so that it meets increased energy-efficiency targets.
Finally, the CHIPS and Science Act – also from 2022 – is providing in the region of US$280bn in funding for the research and manufacture of semiconductors, helping to reduce the nation’s reliance on international supply chains.
Collectively, this package of legislation is driving overall construction demand and buoying the sector as a whole. Many of the secondary locations from our survey – from Atlanta to Austin – have started to attract the new manufacturing industries targeted by these bills, in turn creating new demand for associated homes, precincts and community facilities.
Source: Turner & Townsend International construction market survey 2023
Calculating the effect of exchange rates – volatility dents currency stability
High inflation, rising interest rates and fears around a global economic slowdown have created a heady tonic of turbulent market conditions causing exchange rates to shift readily.
To undertake our analysis of the cost data in our survey, all costs are converted to a single currency, US dollars (USD). While this is the most straightforward way of comparing costs across different markets, it means that exchange rates have an impact on costs and should be considered when drawing comparisons between markets.
Unfortunately, market volatility is a mainstay in the current economic climate and this uncertainty – coupled with contractionary monetary policy –continues to impact exchange rates and the affordability of many countries' imports and exports. Since we last undertook this survey, many currencies have depreciated against the USD since the commencement of conflict in Ukraine.
The USD is often seen as a safe haven and a store of wealth in times of uncertainty, causing a transfer of currency and appreciation. This may also be seen in movement of funds and capital flight as well, particularly with interest rates moving.
Mexico has also seen its currency appreciate, helped by a robust trade partnership with the US, high interest rates and the positive long-term effects of strong fiscal policy during the pandemic. On the other hand, Argentina’s peso has continued its devaluation in a period of economic crisis and defaulted debt.
Our exchange rates, however, are fixed and compare March 2023 values against March 2022, so only capture changes within that window of time. Further doubt about the stability of the global banking system have left many currencies in a state of flux and this has also weakened the USD. While this is not picked up directly in the cost data we analyse in our 2023 report, it will play a prominent role in comparing international constriction costs. As such, a watchful eye is needed to monitor and evaluate currency trends, which can heavily impact project and programme costs.
Source: Turner & Townsend International construction market survey 2023
Construction cost drivers - labour cost growth surpasses materials escalation
A near-universal increase of labour costs and persistently low skills availability is placing upwards pressure on overall construction costs. Resource shortages are beginning to steal a march on material escalation as the prominent component of construction inflation as supply chains recalibrate.
Labour costs
Each year, we collate labour rates across each of our markets to better understand their impact on projects and programmes. Our 2023 survey findings have been influenced heavily by exchange rates, yet our results typically detail a rise in construction wages over the last 12 months. When looking at domestic currency changes, it is clearer to see underlying trends and labour costs have risen by 6.4 percent on average over the past year. Some regions – United Kingdom and North America – closed in on double-digit growth and the vast majority globally demonstrate an increase.
North America remains as the most expensive region for construction labour with average wages sitting at US$70. San Francisco – increasing by 10.5 percent on the year – and New York boost this average and are the costliest places to secure labour, registering US$135 and US$127, respectively. Although there is a large gap between the highest and the lowest values, with the cheapest labour costs present in Mexico City (US$12).
Europe has placed second for most expensive construction labour, with the average wage sitting at US$66. The euro has devalued against the USD over the past 12 months, limiting comparative growth, yet increased by 5.8 percent on average in local currency. This increase has been driven by reduced migrant labour flows as many workers returning to Russia, Belarus and Ukraine, pushing up labour costs despite challenging workloads.
Australia and New Zealand ranked third for most expensive construction labour with average wages sitting at US$58. In 2023, Brisbane has surpassed Sydney and Melbourne, taking the top position across the region, with the average wage sitting at US$67. Across the region there is a significant deficit of construction labour, which was brought on by the closure of international borders for a prolonged period. With demand far surpassing the supply of labour in these markets, skills shortages are expected to continue for some time, which will continue to drive up labour costs.
In the United Kingdom, the average cost of labour has increased from US$43 to US$45, making it the fourth most expensive region for construction labour. Currency devaluation, however, has affected this comparison and at a domestic level, wages have increased by 8.6 percent on average over the last year. With vacancies at all-time highs, a lack of new entrants into industry and low migration compared to pre-Brexit contributing to reduced labour availability and high-cost growth.
Our survey also highlights the disparity between labour costs worldwide, with developing economies typically having access to cheaper resources. Asia, South America, the Middle East and Africa occupy the bottom four positions, posting average wage rates of US$11, US$7, U$S5 and US$4, respectively.
However, it is worthwhile to consider nuances between high and low-cost locations, outside of costs alone. Education, skills levels and overall productivity are key factors in determining construction costs, which are not wholly determined by unit rates of labour.
Source: Turner & Townsend International construction market survey 2023
Skilled labour shortages
Skilled labour shortages continue to be one of the biggest constraints impacting global construction markets, enhancing labour cost increases. Our 2023 survey finds that 74.2 percent of markets have registered a “skills shortage”, 13.5 percent state that skills availability is “in balance” and 12.3 percent of markets have a “surplus”.
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Figure 20:
Availability of construction labour, by region
Source: Turner & Townsend International construction market survey 2023
Having said that, our 2023 survey suggests that there has been a modest improvement in skills availability, with the proportion of markets experiencing skills shortages falling by 5.4 percentage points.
To understand this easing, it’s important to reflect on conditions at the time of our last survey, which came on the back of the COVID-19 pandemic when borders were closed – creating a high baseline from which to compare this year’s data.
This headline figure doesn’t tell the full story, however. Both Africa and South America have a high degree of surplus labour – 66.7 percent and 40.0 percent of markets, respectively – given their softer economic environments. The slack in these markets has tilted the overall availability upwards, yet the concentration of shortages in other markets has strengthened, particularly in advanced economies.
All markets in Australia and New Zealand and the United Kingdom state that there is an overwhelming tightness in their labour supply. North America is nearly there, too – at 90.5 percent – as markets in Mexico are “in balance”. Europe lists 80.0 percent of its markets as experiencing a “skills shortage”, with Spain and Stockholm “in balance” and Warsaw in “surplus”.
Of the trades, the vast majority (49.4 percent) of respondents indicate that Group 1 Tradesman (e.g., plumbers, electricians) are in the shortest supply globally. This is followed by Group 2 Tradesman (e.g., carpenters and bricklayers) at 20.2 percent and general labourers at 15.7 percent, rounding out the top three professions with shortages. The number of green-collar operatives is listed as the skillset that is most sought after in the coming years as net-zero ambitions ramp up and sustainable practices embed themselves further in construction delivery.
Labour is hoped to be more obtainable as pipelines reduce and improvements in productivity come to the fore. Only 15.8 percent of markets in Asia expect skills availability to “decrease” in the next 36 months and these are concentrated in advanced markets: Osaka, Seoul and Tokyo. The United Kingdom and the United States may be particularly stubborn regions, though, with just 11.1 and 14.3 percent of markets saying that skills will “increase” over the coming three years.
Skills shortages will not be solved overnight. The global construction industry has long been caught in boom-and-bust workload cycles with an ever-thinning labour force. Fewer new entrants, ageing populations and more retirements, and less investment in required training and development has led to lower capacity and capability.
Geopolitical uncertainty has also played a part, reducing levels of migrant labour that has often played an important role in construction. Volatility has also prompted insecurity and a transition to steady full-time employment in other sectors, with labour moving away from the construction industry.
The workforce participation rate has also dropped – with people leaving the industry entirely – following COVID-19 and socio-economic lifestyle changes. This has left many industries, including construction, with a significant imbalance across the global market.
Building material costs
Building material costs have surged in recent years and have been central to the direction of travel of construction costs. However, there are signposts to suggest that slower price growth will materialise as input constraints weaken.
From a demand perspective, high costs have prohibited sales, global economic activity is stuttering under elevated inflation and spending power is reducing following reduced credit availability as interest rates rise.
An easing of major congestion and bottlenecks at global ports, the relaxing of COVID-19 restrictions across major trading partners and realised investment in capacity has seen the supply side improve as well. This is allowing for more choice of procurers with renewed access to international supply chains as opposed to paying a premium on local or preferred partner.
The net effect of this has seen price growth come down as demand has reduced and supply has risen. Steel prices, in particular, have fallen notably from conflict and pandemic highs. HRB steel costs in China, Europe and the United States have fallen by 33.8, 40.4 and 43.0 percent since their corresponding peaks following COVID-19 and conflict in Ukraine. These were seen in September 2021, March 2022 and October 2021, respectively.
Source: SteelBenchmarker
However, this reduction isn’t uniform across every commodity or construction material. Differences will be present based on provenance of components, exchange rate discrepancies, logistics constraints and the attractiveness of products.
Where products are manufactured and sourced from only within domestic markets, prices are still seeing strong growth, and this is ultimately being driven by the level of demand across each market.
With pipelines of work now starting to slim further and a notable softening in new private sector investment evident, it is likely that the cost of building materials will become more manageable.
This does not necessarily mean that suppliers will readily pass on savings. Prices may well be sticky and reductions potentially absorbed to preserve cashflow in the face of softer market activity. In addition, with the high-risk landscape that has emerged over the last three years, risk premiums may be baked into prices, even if raw material costs start to fall. This is evident in the return to growth of HRB steel costs over the past three months.
Preliminaries and margins – measured movements
Preliminary cost growth has remained constant as markets settle post the COVID-19 pandemic. Contracting margin performance is mixed and largely tracking market temperature.
Preliminaries and margins can make up a substantial proportion of a project’s cost. Therefore, each year we ask our experts to provide us with a guide on what typical margin and preliminary percentages are in their markets.
Our respondents were asked to indicate what the typical preliminary percentage is on a medium commercial project (5,000m2 GFA). Preliminaries will often vary significantly by region and country, which can be attributed to different types of construction, local building standards, and the complexity of building sites.
In our 2022 survey, the global average for preliminaries registered 15.5 percent which is unchanged 12 months later. Not all markets have stayed the same, however. Africa, Australia and New Zealand, and the Middle East all recorded an increase in the average cost of preliminaries, reflecting higher labour costs and consultancy fees.
Asia, Europe, North America and the UK all saw preliminaries decline over the last 12 months, even if only modestly. In these cases, the loosening of COVID-19 restrictions, with associated health and safety requirements, has played a part.
Participants were also asked to indicate what typical margins are on a medium commercial project (5,000m2 GFA) in their local market. Overall, margins increased over the last 12 months by 0.1 percentage points – to 6.6 percent on average in 2023.
This masks considerable regional variations, including a general decline in rates seen across Africa and Asia. This is partially reflective of dampening market conditions and circumstance of the large increase in construction costs which have been absorbed by contractors. Even where contractors preside over cooler markets, they are still selective over opportunities due to elevated risks and may not always pass on savings – instead looking to recover costs from loss-making projects.
All other regions recorded an increase in average margins over the last 12 months, with the Middle East seeing the biggest increase from 8.2 percent in 2022 to 9.5 percent in 2023. Many of the markets across these regions have continued to see strong activity levels, which typically results in an increase in margins where in-demand suppliers can command higher rates.
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Source: Turner & Townsend International construction market survey 2023
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