San Francisco has world’s highest construction costs: CBRE

Nowhere in the world is more expensive to build than San Francisco, according to a report from brokerage CBRE. The city’s average of almost $440 per square foot narrowly beat out number-two Tokyo with just under $435. Osaka took the third spot at nearly $425 per square foot.

Construction is 5 percent more expensive in San Francisco than in New York, which took the fourth-place spot overall and was second domestically. In the U.S., only Boston and L.A. also made the global top 10 list. Out of the top 10 most expensive cities, London had the lowest construction costs at an average of about $360 per square foot.

The report, which used CBRE and Turner and Townsend research, showed that “labor shortages, supply chain disruptions, increased demand, geopolitical uncertainty and rising costs are all impacting the U.S. construction industry.” It predicted that by the end of the year, construction costs will have risen over 14 percent year-over-year.

The standard annual construction cost escalation is somewhere between 2 and 4 percent, which CBRE data analysts believe won’t happen again until 2023-2024. The company expects material costs to come down before labor, in part because the industry has an aging workforce — one in five workers is currently older than 55 — which has led many to retire or switch to less-physically demanding industries like logistics.

Higher-than-average labor costs are the main reason San Francisco topped the list, according to the report.

“Pent-up labor demand has had a significant impact on San Francisco’s rising construction costs,” it reads. “While there was a 2 percent drop in San Francisco’s construction employment from March 2020 to March 2022, wages grew at an above-average rate as employers tried to attract and retain their workers.”

Developers have repeatedly cited higher labor and construction costs as two key reasons that much-needed housing projects are not moving forward in the city. They have asked the city to look at deferring fees and lowering affordability housing requirements as a way to help entitled properties attract equity partners and begin construction.

“We have all kinds of entitlements in our hands, you know why we’re not kicking it off?” asked Joy Ou of Group I, which has been unable to move forward on its approved 321-unit project at 1270 Mission Street in SoMa. “We have no equity partner. It doesn’t pencil.”

Only one highrise project has broken ground in the city this year — Lendlease’s 47-story office and condo project at 30 Van Ness. The project has been able to begin construction in no small part because the Australia-based company is both self-financing the project and using its own construction arm as general contractor, according to Lendlease’s Arden Hearing.