San Francisco costliest city to build as markets overheat around world

A rebound in tendering conditions sees 38.6% of world’s construction markets classified as “hot” or “overheating”, up from 10% in 2021.

Skills shortages have crystallised across the globe, with 79.6% of markets struggling to deliver labour to meet demand for real estate development.

Turner & Townsend said the findings from its study of construction costs in 88 global markets shows the need for an international outlook to tackle common inflationary trends.

The International Construction Market Survey published yesterday, shows record cost escalation across global real estate.

On the back of rising demand and the release of pent-up investment, 30.7% of city markets are reporting construction inflation for 2022 of 10% or more, with no correction or fall in costs expected soon.

San Francisco has become the most expensive city in the world in which to build, at an average cost of $4,729 per sq m, with the US also accounting for four of the top ten most expensive markets, and nine of the top twenty. 

The high US costs reflect the impact of significant ongoing supply chain disruption and labour shortages meeting a surge in demand, especially for residential construction.

Japan and Switzerland also feature prominently. Tokyo ($4,665 per sq m) and Osaka ($4,559 per sq m) place second and third respectively, with New York in fourth ($4,517 per sq m). Geneva ($4,332 per sq m) and Zurich ($4,286 per sq m) sit at fifth and sixth.

Market ‘temperatures’, which measure pressure on local supply chains based on volume of demand and tendering conditions, also reflect an industry facing tough challenges, Turner & Townsend said. Markets classified as hot or overheating have conditions that could act as a brake on development.

North America – where no markets were hot or overheating in 2021 – has seen the most marked rebound. There are now seven overheating markets: Austin, Houston, Phoenix, San Francisco, Montreal, Ottawa and Toronto.

Neil Bullen, Turner & Townsend’s global real estate managing director, said: “We face headwinds on multiple fronts across the global construction sector and the wider international economy. The continued interconnectivity of markets is clearer now than ever, as we see near universal inflationary trends founded on construction labour shortages, demand exceeding supply, and disruption in supply chains hitting costs and programmes. 

“Companies need to adopt a wider, global view of their construction supply chains to manage the uncertainty as we brace for further challenging months.”

The report points to a number of sectors driving growth and costs across global real estate.

The top performing sector for 2022 is industrial, manufacturing and distribution, led by the vast growth in e-commerce as well as pharmaceuticals manufacturing.

In second and third places are residential/social housing and transport (road, rail and ports), which last year were placed fourth and second respectively.

Housing has benefited from a period of historically low interest rates, though as central banks now act to curb inflation a softening in the market is expected.

A notable jump has been seen in commercial office development, which rose from fifteenth place in 2021 to fifth this year – an indicator of the returning demand for office space post-pandemic, Turner & Townsend said.