OPINION: CONSTRUCTION material costs are largely stabilising across the globe, but a mixture of local and micro-economical cost factors will continue to push developers to the brink.
Rising interest rates and inflation, emerging trends, regulatory changes, and geopolitical developments are poised to upend the feasibility of even the most optimistic development – according to insights from Altus Group’s Development Advisory experts.
In the midst of all this uncertainty, developers can expect headwinds in the form of cost escalations, stagnating revenue, and delays in project development and delivery timelines. But the situation isn’t entirely bleak. Emerging sustainability and AI technologies, along with the abundance of industry data, could prove decisive in helping developers navigate unpredictability in the coming years.
Australian developers face cost pressures from different fronts
How does the global outlook influence the situation down under? Ongoing conflicts in the Middle East, particularly in the Red Sea region, have disrupted shipments of building supplies like laminated timber and beams to Australia. The conflict has also rerouted billions of dollars in shipments around the Cape of Good Hope, creating flow-on delays in the global supply chain that further stall the arrival of construction materials and commodities on Australian shores.
These geopolitical developments, coupled with growing demand for affordable housing, will likely destabilise previous price trend estimations and lead to costlier bricks, cement, and timber. But material costs, however significant, will likely make up half of a developer’s expense sheet. The other half will be gradually overtaken by rapidly rising labour costs.
Australia’s construction industry is still facing a chronic shortfall of 486,000 workers needed to deliver the nation’s many public infrastructure projects and over 1.2 million new homes by 2026. Developers can expect to face more intense competition over a finite pool of skilled tradesmen and technicians servicing both the public and private sectors, inevitably driving up hiring costs and further distressing project timelines.
Where will developers feel the pinch the most? Fed by interstate and overseas migration, property demand in Queensland continues to chart all-time highs, translating to higher material costs and labour wages. Massive rebuilding efforts in the wake of natural disasters up north and flooding in New South Wales will intensify pressures on the availability of material and labour. Ongoing federal megaprojects like the Western Sydney Infrastructure Plan, Melbourne’s West Gate and Metro Tunnels, and Sydney’s Metro ambitions – to name a few – will further strain already precarious supply.
Taken altogether, Altus Group’s Development Advisory team predicts that construction costs in Australia are likely to rise between 4 and 8%, with some sectors or areas like private construction likely seeing a far higher rise than 8%.
Adaptation and clarity are the keys to survival
With these looming constraints, Australian developers can’t afford to idle by – they must act decisively and somehow adapt to current market conditions. The labour shortage and rising construction demand mean developers can’t control costs by slashing their workforce or material purchases – so what else can be done?
1) Adopt sustainable building practices and materials
An immediate area to address is rework, which consumes a surplus of building material, creates waste, and locks valuable workers in repair work. Addressing rework also has the side effect of reducing a developer’s embodied carbon footprint – supporting existing initiatives to meet their net-zero targets.
Developers should also explore sustainable building materials, such as locally sourced timber or recycled concrete and brick. While sustainable materials may have a higher upfront cost, they allow developers to circumvent delays or supply bottlenecks for their projects, which are costlier in the long run. Additionally, the use of prefabricated materials or structures can reduce the need – and costs – of transporting and storing materials onsite. This approach also allows developers to shift the costs of labour to the prefabrication foundries.
2) Access the potential of market research and data
Without real-time visibility into market conditions and prices, developers can do nothing but react to changes as they happen globally and on the ground. The construction industry stands to benefit from greater access to all industry-related data so they can build better projections and confidently plan for fluctuating costs and delays, months ahead.
Access to more data is also essential to realising the potential of AI, particularly for quantity surveying. Feeding an AI algorithm with data on material costs, labour supply, blueprints, and location will enable it to learn, analyse, and build predictions on a variety of areas – from cost estimations for a building to sales predictions, and even optimised development plans.
Australia’s construction industry may face volatility now, but nobody knows how conditions may change in the future. Developers, however, have an imperative to adapt. More consideration must be paid to technologies or solutions that can provide developers with the visibility and agility required to adapt to shifting markets. For the price of inertia is far costlier and bleak, be it for developers in Australia or around the world.
By Niall McSweeney, President, Cost & Project Management, Asia Pacific at Altus Group.*
