Cost Management Report

「Materials Prices Remain High, Labor Supply Constraints Severe,
Construction Prices Continue to Rise on the Back of Solid Demand」

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This report has been prepared by the Cost Management Group of the Architectural Design Dept. of Nikken Sekkei Ltd for information purposes. While the information in this report is current as of the date of publication, its completeness is not guaranteed. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

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Materials Prices Remain High, Labor Supply Constraints Severe, Construction Prices Continue to Rise on the Back of Solid Demand

Factors contributing to higher construction prices: rising material prices, labor supply constraints, firm demand outlook

Construction prices (NSBPI*1) rose 24% on-year. The rate of increase in prices was larger for MEP work than for building work (Fig. 1). The main reasons for the increase by work type are, building = steel materials, electrical = labor costs, and HVAC and plumbing = specialized work and labor costs (Fig. 2). In addition to materials price hikes, labor costs and specialized work costs are rising due to labor supply constraints, such as the labor shortage and the “2024 Problem” *2, etc., and are being passed through to construction prices on the back of firm demand forecasts.

Material prices: a lull in upward momentum

Materials prices have continued to rise, mainly due to soaring raw materials prices. However, except for double glazing, there are signs of a lull in the recent rise (Fig. 3). Although it should be noted that there is a time lag between certain trends and construction prices, there are signs of high construction prices owing to materials price increases coming to an end.

  • Fig.1: On-Year Comparison of NSBPI by Construction Work Type Fig.1: On-Year Comparison of NSBPI by Construction Work Type
    Compiled from Nikken Sekkei data.

  • Fig. 2: Breakdown of Reasons for Increase in Fig. 1 Fig.2: Breakdown of Reasons for Increase in Fig. 1
    Compiled from Nikken Sekkei data.
    Materials include ductwork costs.

  • Fig. 3: Price Index Trends for Building Materials Fig. 3: Price Index Trends for Building Materials
    Compiled from the Bank of Japan’s Corporate Goods Price Index.

Labor supply constraints continue due to labor shortages, the 2024 Problem, etc.

As the number of skilled trade workers continues to decline and the aging of the workforce continues unabated, wage increases are proceeding as part of efforts to improve the working environment. Compared to the manufacturing industry, wage increases in the general contractor industry (mainly prime contractors) and the specialty contractor industry (mainly subcontractors) are larger (Fig. 4). In addition, there is competition to secure trade workers due to the supply-demand gap and the response to the 2024 Problem. Construction prices are expected to continue to rise due to labor supply constraints.

Forecast: Steady construction demand to put upward pressure on prices

Real construction investment (private-sector housing + private-sector non-housing) in FY2024 is expected to increase 1.3% from FY2022 (Fig. 5). Strong construction demand is expected to continue to push up construction prices due to firm materials prices and labor supply constraints. Even if a shift in monetary policy leads to a future decline in construction demand, wage costs, which are included in labor and materials costs, are likely to remain unchanged due to strong downward rigidity.

  • Fig. 4: Construction Industry Daily Wage Trends Fig. 4: Construction Industry Daily Wage Trends
    Compiled from the Ministry of Health, Labor and Welfare's "Monthly Wage Survey (of businesses of five or more employees), calculated as follows: Prescribed salary ÷ prescribed working hours × 8 hours + special paid salary ÷ number of days worked.

  • Fig. 5: Real Construction Investment (Private Construction) Trends Fig. 5: Real Construction Investment (Private Construction) Trends

    Compiled from the Ministry of Land, Infrastructure, Transport and Tourism's "Construction Investment Forecasts" and the Research Institute of Construction and Economy’s "Construction Investment Forecasts Based on the Construction Economics Model”.

Composite Index Continues to Rise

Nikken Sekkei Standard Building Price Index NSBPI*1

The composite index (for the Greater Tokyo Area) continued its upward momentum, rising about 5% from the previous quarter and about 24% from the same period last year. In the Kansai Area, both building and MEP gained momentum, rising about 6% on-year, and about 4% on-year in the Tokai Area (Fig. 6).
In building work, temporary work, steel frame, ready-mixed concrete, and finishing work categories are rising. MEP work was affected by rising labor costs and specialized work prices due to labor supply constraints. Overhead rates also rose and upward momentum remains strong (Fig. 7).

  • Fig. 6: Changes in NSBPI Fig. 6: Changes in NSBPI

  • Fig. 7: Percent Change in NSBPI and Contribution of Building Work and MEP Work Fig. 7: Percent Change in NSBPI and Contribution of Building Work and MEP Work

Steps to achieve a “four-week/ eight-days closed” work schedule accelerate due to the 2024 Problem

The Japan Federation of Construction Contractors has announced its "Declaration on Securing Appropriate Construction Periods," and a movement is growing to secure a four-week/eight-days closed work schedule to counter the 2024 Problem. Acceptance of the new “four/eight” work style has been increasing every year. The adoption rate stood at 31% in FY2022 and is expected to accelerate in the future (Fig. 8). The 2024 Problem also applies to logistics, which will affect transportation costs and process planning (making it difficult to specify material delivery times), etc. Caution is thus warranted.

NSBPI remains flat in US dollar terms due to yen depreciation

In U.S. dollar terms, construction prices have fluctuated less than they did in Japanese yen terms after the 2008 GFC, remaining mostly unchanged (Fig. 9). Foreign investors see the recent sharp rise in yen-denominated assets as offset by a weaker yen. While the yen's depreciation is one factor in yen-denominated price appreciation, the main factor is as noted above.

  • Fig. 8: Trends in Implementation of the Four-week/Eight-days closed Work Schedule Fig. 8: Trends in Implementation of the Four-week/Eight-days closed Work Schedule
    Prepared by the Japan Federation of Construction Contractors from the "Action Plan to Achieve a Two-days off Workweek: FY2022 Full-year Follow-up Report.”

  • Fig.9: Changes in the NSBPI (in U.S. dollars) Fig.9: Changes in the NSBPI (in U.S. dollars)
    Compiled from Nikken Sekkei data and the Bank of Japan's "Exchange Rates".
    U.S. dollar indexes are estimated based on September 2008 exchange rates.

*1: Nikken Sekkei Standard Building Price Index (NSBPI):
An index showing price movements in construction prices, calculated independently by Nikken Sekkei Ltd. The index is calculated using standard tenant office space as a quantitative model and reflects actual construction prices determined by Nikken Sekkei‘s own surveys as needed. The first quarter (Q1) is from January to March, Q2 is from April to June, Q3 is from July to September, and Q4 is from October to December.

*2: The issue of overtime caps, due to be applied to the construction and logistics industries from April 2024.

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