Cautiously optimistic. That’s how Mortenson sums up the outlook for commercial construction even as the industry deals with labor shortages, higher interest rates and the higher cost of materials.

That’s the overall sentiment from Mortenson’s first-quarter Construction Cost Index. And in Milwaukee? Construction companies here are dealing with construction costs that are rising faster than then national average.

First, the big challenge: Mortenson said that with inflation delaying any reduction by the Federal Reserve Board in interest rates, continued workforce challenges keeping labor costs high and national supply chain workarounds in the wake of the Francis Scott Key Bridge collapse, construction firms are facing longer lead times and higher costs for construction materials.

Stuck above 3% despite a softening job market, the inflation rate continues to stymie The Federal Reserve’s intentions to further cut short-term interest rates to 4% by December 2024.

Nationally, nonresidential construction costs tracked by the Mortenson Quarterly Cost Index for the first quarter of 2024 increased by 0.34%, a 1.89% increase over the previous 12 months following several quarters of relatively flat cost movement.

Mortenson regional offices reporting cost increases this quarter include Milwaukee (1.29%), Seattle (.72%) and Minneapolis (.52%), while Portland, Denver, Phoenix and Chicago remained relatively flat.

Mortenson reported that all markets are seeing volatility in the price of material and equipment. On a trade-by-trade basis, electrical contractors (1.5%), structural framing erection (+1.8%) and metal fabrication (+1.9%) were the top three trades seeing cost increases.

Trade partner work, which accounts for roughly 51% of the cost index weighted value, increased by 0.7% during the quarter, while construction materials (43% of the cost index) decreased by 0.2% and labor (6% of the cost index) increased slightly by 0.9%. Still, labor costs have increased an average of 4.3% over the last 12 months, contributing in part to a similar 3.2% cost increase for trade partner work.

Nationally, the Mortenson Cost Index increased by 0.34% for the 1st quarter of 2024, a 1.9% increase over the previous 12 months. Costs in Milwaukee increased 1.3% in the most recent quarter and increased 2.3% over the last 12 months.

Construction employment in the Milwaukee metro region totaled 35,200 in March of 2024. This is a 5% increase (1,700 workers) compared to March of 2023. The cost and procurement of labor is a persistent industry challenge.

Various industry sources estimate a need for 450,000 to 550,000 new craft workers above the normal pace of hiring in 2024 just to meet demand, Mortenson said. The Associated General Contractors of America further notes that hiring among its members is already more difficult in 2024 than it was in 2023, a trend expected to continue into 2025.

Despite those headwinds, the Dodge Construction Network expects total spending on construction starts to eclipse the $1 trillion mark this year. Indeed, the first two months of 2024 saw a 26% year-over-year increase in nonresidential construction spending to $67.6 billion, compared to $53.5 billion in 2023, with the institutional sector buoyed by robust activity in both education and healthcare construction.

Nationally, while average construction material costs have remained relatively flat, the collapse of the Francis Scott Key Bridge is expected to impact supply chains in the short term, particularly on the East Coast. Baltimore, the 17th largest port in the US, is a hub for vehicle and coal imports and exports, and disruptions to the supply of construction materials are expected as freight moves to alternate rail and trucking routes.

Mortenson’s construction cost index shows a modest increase in costs for the 1st Quarter 2024 after a period of either negligible or slower cost increases experienced across 2023. Inflation and the cost of labor procurement remain a burden to projects, but overall spending on non-residential construction starts remains healthy, with additional market activity expected to grow in tandem with interest rate cuts expected in the second half of the year.