Construction businesses across Europe are reporting reduced activity, as confidence and private investment is hit by steeply rising costs, shortages of materials and labour, and difficult financing conditions due to higher interest rates, according to new research.
The international construction market survey from Turner & Townsend finds however that construction inflation is expected to cool, with an average forecast of 6.4% for 2023 over the 16 European regions surveyed, down from 12.7% in 2022.
Despite this, Munich has risen to become the most expensive construction market in the EU, with an average build cost of US$3,787 (€3,482) per m2. The city has overtaken Dublin (US$3,708, €3,409) which held the top spot in 2022.
Munich’s high labour costs, averaging US$81.3 (€74.8) per hour, far exceed the US$47.6 (€43.8) per hour in Dublin, as Germany and many other European markets suffer labour shortages.
However, no EU region comes close to reaching the expense of Switzerland – with Geneva and Zurich now the 3rd and 4th most expensive construction markets in the world, at US$4,662 (€4,286) and US$4,653 (€4,278) per m2 respectively.
Martin Londra, European real estate lead at Turner & Townsend, said: 'While Europe continues to try and bring inflation under control, construction is suffering the twin problems of higher interest rates and a structural skilled labour shortage.
'The positive investments in infrastructure and sustainability from governments across Europe risk being hamstrung by this labour and capacity crisis.
'To mitigate these impacts, clients need to work as closely as possible with supply chains to identify and share risk, build resilience into procurement, and scan the horizon to anticipate potential shocks.'
Government intervention
European construction contraction has so far been tempered by the high levels of public investment, with significant government intervention aiming to stimulate growth, improve connectivity, and cater for the continent’s expanding population.
Private sector investment in industrial, manufacturing, logistics and data centres remains a bright spot, due to the continued digitalisation of society and boom in e-commerce post-pandemic.
Europe’s contraction comes in the context of a global construction slowdown, as appetite for real estate investment worldwide is being curbed by a combination of high inflation, labour shortages and rising interest rates that are acting as barriers to project finance.
Global outlook
From a survey of 89 global cities, the US dominates the rankings of the most expensive places to build, with six US cities in the top ten.
New York is the most expensive market, with an average build cost of US$5,451 (€5,012) per m2, and San Francisco following closely behind on US$5,200 (€4,781).
These figures have been fuelled by the strong US dollar, but also the impact of Bidenomics – a series of US policy interventions designed to stimulate growth in advanced manufacturing and green technology.
The report points to the impact on the President’s inflation reduction act, which focuses on supporting green industries, as driving investment in secondary markets across the US.
Meanwhile, 74.2% of global markets show a ‘skills shortage’ in the report.
