Construction activity slows down in Europe amid costs and labour shortages

The construction markets of post-pandemic Europe are now facing huge economic challenges. Photo: Adobe Stock

The International Construction Market Survey (ICMS) by consultancy Turner & Townsend also reveals that adverse economic conditions have negatively impacted confidence and private investment in the sector.

The research does show, however, that construction inflation is expected to cool down, with the forecast across 16 European regions surveyed being an average of 6.4% for 2023, a significant drop from the 12.7% recorded in 2022.

According to the report, Munich has now surpassed Dublin as the most expensive construction market in the European Union (EU), with an average build cost of €3,482/m².

Labour shortage hikes costs

The shift in rankings is primarily due to Munich’s high labour costs, averaging €74.80 per hour, which far exceed Dublin’s rate of €43.80 per hour.

Germany and several other European markets are currently facing significant labour shortages.

However, despite Munich’s high costs, Switzerland ranks highest in terms of construction expenses.

Geneva and Zurich have now secured the third and fourth positions respectively in the global ranking of the most expensive construction markets, with costs amounting to €4,286/m² and €4,278/m² respectively.

Despite the challenges faced by the construction industry in Europe, the region has been sustained by substantial public investment. Governments have intervened to stimulate growth, improve connectivity and accommodate the expanding population.

Turner &Townsend’s ICMS report for 2023. Photo: Turner & Townsend

The private sector has also witnessed positive investment trends in industrial, manufacturing, logistics, and data centre projects, buoyed by the digitalisation of society and the e-commerce boom post-pandemic.

Global challenges

The ICMS also indicates a wider global decline in confidence within the construction sector, with high costs beginning to impact market appetite.

In a survey of 89 global cities, the United States dominates the list of the most expensive places to build, with six US cities in the top ten. New York tops the chart with an average build cost of €5,012/m², closely followed by San Francisco at €4,781/m².

The figures reflect the strength of the US dollar but are also influenced by the impact of Bidenomics, a series of policy interventions aimed at stimulating growth in advanced manufacturing and green technology.

The report highlights the US President’s Inflation Reduction Act, which focuses on supporting green industries, as a driving force behind investments in secondary markets across the country.

After New York and San Francisco, Geneva and Zurich claim the third and fourth positions in the global rankings of construction cost, while Japan’s Tokyo €4,207/m² and Osaka €4,134/m² secure fifth and sixth places.

Both Hong Kong €3,946/m² and London €3,567/m² have dropped out of the top ten rankings for the first time, overtaken by US markets.

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.”

The full ICMS report can be viewed here