San Francisco overtakes New York as most expensive city to build

San Francisco has unseated New York City as the most expensive place on earth to build, with construction costs forecast to rise a further 6 percent in 2019 as tech sector expansion continues to drive construction demand, according to new research from global professional services company Turner & Townsend.

The average cost of construction in the city has reached $417 per square foot,as high demand from Silicon Valley’s tech giants for new-build commercial buildings makes the Bay Area the hottest construction market in the United States. Construction cost inflation in San Francisco ran at 5 percent in 2018.

The International Construction Market Survey 2019finds that only three markets worldwide — San Francisco, Seattle and Amsterdam — are classed as “overheating”. In North American cities, the impact of trade tariffs on materials, both real and anticipated, is exacerbating the existing cost pressures caused by growing labor shortages.

New York has now fallen behind, with average build costs of $368 per square foot. Tendering conditions are still described as “warm”, but construction cost price inflation is expected to be a more muted 3 percent in 2019 — down from 3.5 percent last year.

Average construction price inflation across the world is forecast at 4.1 percent over the next 12 months.

Following the U.S. cities, London ($352 per square foot), Zurich ($349 per square foot) and Hong Kong ($348 per square foot) round out the top five most expensive places to build worldwide. Seattle has risen up the ranks to sixth ($338 per square foot) and Chicago now sits in eighth place ($290 per square foot). The extent of the price escalation across the top-performing markets means that for every building constructed in San Francisco, you could build seven similar structures in Bangalore or Istanbul for the same cost.

The impact on cost pressures is considerable in North America, which has the highest labor costs worldwide — with wages in New York hitting $101.30 an hour on average. Wage rates for certain high-skilled labor, such as steel workers, now exceed $250 per hour in the city.

Across North America, the ongoing trade war with China is applying additional upward pressure to construction prices, with material costs for steel and aluminum continuing to increase and creating customs delays.

As a result, clients can expect to spend between 5 percent – 10 percent more on overall core and shell construction. The 22.4 percent rise in the price of U.S. steel over the past 12 months is driving some developers to look at alternate types of construction for low-rise buildings, such as mass timber structures.

John Robbins, Turner & Townsend’s managing director USA and North America head of real estate, added, “The Silicon Valley effect, and general growth throughout the San Francisco Bay Area, has created a blisteringly hot construction market in San Francisco. It has not only driven some of the highest construction costs we’re experiencing in the United States, but it’s also putting significant strain on the local supply chain.

“The big challenge for the San Francisco Bay Area and wider U.S. construction market is meeting this demand in the face of import tariff talks, escalating materials costs, and a shrinking skilled labor force. Simply turning to local supply isn’t solving the problem, and as contractors look to build greater contingency into their prices, to mitigate the impact on input costs, clients are considering other strategies to develop their real estate — from alternate and more unique construction methods, to reductions of their build programs.

“Given the high cost of labor in the United States, the region has a more urgent need than most to be investing in labor-saving technology and innovative delivery models to improve productivity. The skills shortage is not going to go away, and with persistently buoyant demand across the region it’s difficult to see where the additional capacity can be mobilized, and without that we’re looking at competitive bidding for labor and ever steeper wage hikes.”

Globally, the report highlights a strong construction market, with 28 percent of markets surveyed classed as “hot” or “overheating”.

At the same time, Turner & Townsend warns of the industry’s exposure to wider economic pressures. The report calls for greater investment in technology and new ways for working to address historic low productivity in construction — enabling greater control of costs that can unlock and sustain investment across global markets.