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Rising Costs a Challenge to Construction Industry

Analysis

Construction and fit out costs are rising as the dramatic labor shortage witnessed in all phases is causing enormous challenges for the real estate market in Hungary, with an insufficient number of both specialized workers and trained engineers.

CBRE office at Eiffel Palace.

On top of that, the high volume of construction orders is exerting increasing pressure on development time schedules according to CBRE.  

“I would define the labor shortage as an overall slowdown circumstance that needs ongoing management and control on the developer side,” comments László Barna Harangi, head of project management and building consultancy at CBRE Hungary.

“The availability of the different experts is limited, so significant preparation work needs to be done and capacity checks needs to be conducted prior to securing constructor resources at the right time. As a result of the missing immediate capacity, a separate mobilization time is becoming common in every project before the real on-site activity is started,” Harangi adds.

CBRE’s “Cost Guide for Hungary” aims to provide guidance regarding the costs of office space formation. The formerly biennial report is now being updated annually, due to rapidly changing regulations and circumstances according to the consultancy.

Longer Delivery

“The delivery time of projects is getting longer as general constructors have to face the same phenomenon on every level of the subcontractor market. A possible solution is the creation of reserves not only regarding budget but timewise as well,” adds Harangi.

The large price increases are seen as due to two major factors in the construction industry: firstly, the increasing labor shortage: statistics indicate that the labor force in Hungary fell by 26% between 2007 and 2012.

With a large proportion of the workforce having moved abroad there remains a significant shortage of qualified labor. A further factor is that the construction sector itself shrunk significantly in the economic crisis and has yet to fully recover.

“One possible solution to help ease the strain on the sector is to train and develop future professionals internally by increasing the level of higher and vocational education training provision,” comments CBRE.

The other major factor putting upward pressure on prices is increasing lead-in times as the capacity of suppliers and subcontractor is shrinking.

“It is important to point out that the shortage of professionals has now become a feature of all the professions involved, from skilled workers on site to qualified engineers. The situation is further exacerbated by the fact that, in addition to the office segment, development activity in both the retail and the industrial and logistics sector increased in 2019 and this trend is set to continue,” CBRE says in the publication.

Rising Demand

Between 2016 and 2018 the rising demand for and growing cost of construction materials caused a 26% increase in costs, while auxiliary costs are 14% higher. The average cost of a basic fit out is now put at around EUR 890 per sqm compared to EUR 770 in 2018.

This includes all construction and soft costs on top of the basic shell and core standard provided by the landlord, according to Harangi. Overall construction activity could fall by 2020 and could stabilize at a lower level by 2023. CBRE expects a further 10-15% annual growth, meaning that fit-out costs could be EUR 1,000-1,200 per sqm by the end of 2020.

“Developers are placing more and more emphasis on sustainability issues. It is a complex task to handle as, on the one hand the design and construction activity itself should be organized in a green way to minimize the recovery works afterwards, and on the other hand the built-in materials should be used wisely and the final product should result in a low carbon footprint; in general the legal and regulatory environment is continuously changing based on international agreements,” the expert points out.

“Buildings should be able to accommodate different technical solutions and should be ready to react to changing technical demands with low disturbance,” Harangi concludes.

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