Construction cost worries

Surging and erratic construction costs are a headache for the real estate sector. Projects that are now in the development phase have to deal with the rising costs of labour and materials, inflation, delivery woes and increased regulatory burdens. In a report titled “Mitigating Construction Cost Risk for Investors and Developers in Europe”, CBRE forecasts the future of construction costs. The Dutch and other European markets will be hit by major challenges because construction cost inflation is rising at a higher rate than consumer price inflation.

How can we keep the process moving and ensure that we create space for feasible development and redevelopment projects? We asked consultants in a number of different departments to give us their views.

Time for change
Do the forecasts in the report mean that new projects and redevelopments will all grind to a halt? It’s certainly not as bad as that, but if we want to solve the complex problems we face, like shortages of materials, erratic price developments and challenging sustainability issues, we can only do it with the transparent, flexible and long-term cooperation of the entire real estate sector. This is something new and exciting for this traditional industry, known for its fragmented chain and certain degree of mistrust. The traditional way of doing business will lead to contractors either walking away from tenders for new projects, or reacting by seeking coverage for higher and higher rates of risk, which would make it impossible for clients to finance their developments.

Sector integration
The current situation makes it clearer than ever before that cooperation has to be much more integrated into the real estate sector in order to anticipate all the challenges we face, including sustainability issues. The real estate sector has to adopt a less distrustful and individualistic way of working; we have to open things up. In concrete terms this means that contractors and suppliers have to be involved in the early stages of the design process. Inviting designers and builders to the table early on will result in totally different and circular design choices that will benefit the realisation and even the exploitation phase.

Transparency
Transparency and trust are crucial in this respect. The trick here is to identify the implementation and delivery risks in the early stages, and to integrate them in the business case and the design process. It’s also important to spread the risk across the entire chain. This can well make the difference between getting the go-ahead on a project and that same project dying on the drawing table. An open, industry-wide discussion will ensure that all parties can continue with their work, despite the uncertainty. CBRE wants to stimulate and facilitate such conversations, with the help of a risk and indexation scheme.

Flexibility
Long-term relationships demand empathy and flexible procedures. Covid-19 has taught us that the world change radically from one day to the next. This also means that a long-term development or redevelopment contract can be hit by a crisis at any stage, which then necessitates a change of course. The crux is not to point fingers, but to join together to seek out innovative solutions to keep the project feasible. Obviously, every contractor has to meet their obligations, but exceptional times and events require empathy and partnership in order to devise new, creative solutions.

So what’s next?
No one will deny that price increases, delivery times and uncertainty about the future demand a lot from the real estate sector. Clients, builders and advisers like CBRE are all noticing the effects.

But there are still endless possibilities to work together and come up with smart solutions for our partners. To do this, the entire real estate industry has to show it is ready and willing to work together to deliver custom-made solutions. In our report forecasting the future of construction costs in Europe, we have already put forward a number of concrete suggestions to get us started!

Read more: Investors: Mitigating Construction Cost Inflation Risk in Europe.