Regional overview

North America

⏱ 4 min read

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Resilience despite uncertainty

Author: Lisa Woodruff, Regional Real Estate Lead, North America

Despite elevated prices and high interest rates, the economic outlook for the United States, Canada and Mexico has remained strong. However, sticky inflation, a capacity crunch and political uncertainty may yet put this economic resilience to the test.

North America as a whole is experiencing a solid economic recovery. The International Monetary Fund expects the continent to see a climb in real GDP growth from 2.5 to 2.6 percent over the coming year.

This resilience is being reflected in the real estate market, as investment flourishes in leading sectors including industrial manufacturing, life sciences, healthcare and data centres.

Current tendering condition

Future market outlook

Despite this positivity, core inflation remains stubborn, giving cause for central banks to keep interest rates higher for longer. In the US, political uncertainty around November’s presidential elections is adding to the Federal Reserve’s sense of caution – significant rate cuts are not set to materialise for some time. Meanwhile, in Canada, growth remains sluggish with sustained, elevated interest rates beginning to have a sharper impact on businesses’ resilience and labour.

Cracks may begin to show in the real estate sector as a result, with these likely to affect cost escalation forecasts.

Supply chain bottlenecks have largely settled, the US dollar has remained strong and stable, and a recession has likely now been avoided.

Growing industrial demand drives investment

As the need for data storage continues to boom, the number and scale of data centre projects is increasing, with hyperscalers setting out significant investment plans.

These developments are naturally clustering close to urban centres and technology hubs, where the need for data is greatest. The northeastern states of the US, the West Coast and the Midwest are seeing particularly significant growth.

Reflecting this strong demand, New York, Boston and San Francisco all saw the highest rate of construction cost escalation in the US, at 6.0 percent through 2023. Chicago, a data centre hub saw 5.0 percent cost inflation in 2023.

The trend towards large-scale data centres to meet the requirements of the increasing use of AI is benefitting markets such as Dallas in the US and Toronto in Canada, due to the availability of large amounts of affordable land nearby, outside of the metropolitan areas.

In the US, funding is now flowing through federal bills including the Biden administration’s Inflation Reduction Act and CHIPS and Science Act – most prominently in the Southeast and Midwest regions. With competition high in these markets, the cost of building advanced manufacturing facilities in Atlanta and Nashville now sits at US$7,414.00 per m² and US$7,560.00 per m² respectively.

In Mexico, the rate of cost escalation is greater still. The promise of significant export markets in the US and Canada, but comparatively lower costs to build, is leading investment to be loaded into advanced manufacturing in Monterrey and Mexico City at an average cost of US$1,918.00 per m², and US$1,844.13 per m², respectively.

Large-scale projects underway in the manufacturing sector are also triggering demand more broadly, including in residential and public sectors – as well as in infrastructure – as developers work to build the homes, facilities and transport networks to attract and serve the thousands of workers.

Industrial is seeing huge demand as policymakers seek to onshore and nearshore advanced manufacturing capabilities and challenge China’s dominance in the production of technological components, such as batteries and semi-conductors, as well as electric vehicles.

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Skilled labour shortages deepen

This growing investment will place pressure on an already tight labour market, following the swathe of early retirements and career moves seen during the pandemic, pushing costs upwards across the board. The average hourly wage in North America has reached US$75, up 7.1 percent since last year, though there are significant variations across markets. San Francisco, the most expensive labour market averaging US$135 per hour compared with Mexico City at US$12.

While increased costs for skilled labour can be factored into plans from an early stage to keep projects on track, pressure on timelines and overall capacity will prove acute issues for the construction sector. A limited supply of green collar skills, for example, risks not just project delays, but limiting the progress of the industry’s carbon reduction.

In Canada, another stress is being placed on capacity in the form of increased risk of insolvencies as businesses begin to feel the effects of high interest rates more acutely. While this trend is contributing to the stabilising of wage growth as vacancy rates lower, reduced capacity overall across the sector, may act to prevent cost escalation from falling sharply.

Developers will need to mitigate this capacity crunch in the immediate term – positioning themselves as an attractive client to secure the right supply chain and investing in digital tools and automation to boost efficiency. Just as important will be managing this for the long term, by bringing new talent into the industry and building the specialist skills to meet current and future needs.

As clients look to decarbonise their assets, and as states put legislation in place to encourage greater carbon efficiency, competition for green collar skills – and the associated costs – will continue to rise.