A few weeks ago, I wrote about how construction job openings are in freefall. This Wall Street Journal article, “How Immigration Remade the U.S. Labor Force,” highlights the post-pandemic immigration surge. Construction job openings have been down over 35% since February 2024. That's 161,000 jobs that don’t exist today. Construction prices have three major components: contractor profit margin, commodities, and labor cost. DXD is in the market every day soliciting construction prices. We are on the front lines of development and in a unique position to see construction price trends nationwide. We have been seeing contractors get more aggressive with construction pricing in 2024. Primarily, that means reducing their profit margins to make prices more attractive. One of the reasons why contractors are being more aggressive with pricing is because construction starts are down year over year, and they want to fill their calendar for 2025
Predicting and capturing commodity price advantages is very challenging. Timing is easier for developers who can sit on a project and time their construction with an eye on commodity price decreases. Since we know that oversupply and first-to-market are critical for self storage development, holding off on construction is challenging unless that site is so unique that competition will be limited to none.
The next shoe to drop is labor cost. I've been told that labor costs never go down; they just flatline. However, in my 20-year career in construction, we have also not seen immigration levels as elevated as they have been over the last three years. Peak immigration in 2023 was roughly 1.5X more than the previous peak in 2005. Construction is one of the most accessible trades for new immigrants to the US, especially for non-English-speaking male immigrants. It's also a trade where hard work and dedication can help someone achieve the American Dream.
Once stalled, the development business takes a long time to ramp back up. It will take more than one of two rate decreases to make financially unfeasible projects viable again. For the remainder of 2024 and into 2025, we will see a softening in another component of construction prices: labor costs.
It is inevitable.