[+] Big Build, Commonwealth Games to Impact Construction Costs

A CFMEU banner hangs across a crane at the site of Melbourne’s Town Hall Train Station development, part of Victoria’s Big Build. Further south of the CBD near the Yarra River Mitchell Brandtman associate Zaron Smith is speaking on stage at The Urban Developer’s Melbourne Residential Development Summit. Smith says the Big Build is just one element impacting construction costs in Victoria over the next few months. Big budgets and saturation in the labour market is creating a very constrained market for the smaller end of town and heavily affectiving feasibility of projects. “The demand for materials and labour for these projects will have an impact on a construction industry already at capacity,” Smith says. “Typically infrastructure goverment projects if they require speed in completion, they will require more staff. “Infrastructure projects typically have larger budgets that could encourage more appealing pay packages for staff.” Construction costs have been on many a developer’s mind for a long time — 2022 was a year of insolvency in the construction industry and many are concerned that 2023 will be the same . Porter Davis is just one of the more recent victims. Covid and a war breaking out in Europe hasn’t helped either with skilled labour shortages and the cost of materials also increasing. Smith said these too were key concerns. ▲ Zaron Smith speaking at The Urban Developer's Melbourne Residential Development Summit. “And part of these building costs rising is because of the skilled labour availability that we’re struggling to find at the moment,” he says. A National Skills Commission report from December 2022 found that out of 914 occupational titles, more than a third were experiencing labour shortages. “That’s not just impacting metropolitan Melbourne and the ring around Melbourne but it’s also impacting regional Victoria as well,” Smith says. But now other factors from the state government’s investment decisions to migration and market forces are coming into play. “We’ve seen a perfect storm environment that's resulted from initially Covid,” Smith says. “But there are other massive factors that have contributed to supply chain issues and labor availability in the country and specifically in Melbourne Victoria as well.” The state government is also spending on education centres and schools, on key parts of public infrastructure and on medical centres and hospital and clinic upgrades. The projects don’t stop at government investment though — someone has to build them and that is affecting labour availability and therefore construction costs, which is impacting the feasibility of projects across the state. And it is not just limited to metropolitan or suburban Melbourne — the government needs to move fast to develop and upgrade much needed infrastructure in time for the Commonwealth Games in 2026. With four regional cities playing host, Smith expects to see a scattering of contractors out to those areas as well as an increase in transport costs for materials. “So obviously, it is a massive international event but an incredibly tight timeline over the next three years to 2026,” he says. “Considering the capacity and resourcing restrictions that we’ve experienced, that’s going to decentralise not only the workforce but then getting the supply of the relevant materials out to those areas. “And obviously with more travel and more transportation costs, unfortunately, we’re seeing an increase through construction costs. “It might be offset by people holding off until the games are done.” ▲ The Victorian government has opened the EOI process for construction of the 2026 Commonwealth Games athletes' villages. Residential construction is leading other sectors but Smith believes it has hit capacity. “The residential component of the industry is leading the industry at the moment, with non residential building approvals, sort of lagging behind,” Smith says. “But more importantly, in these two particular parts of the industry, they’re at peaks at the moment. “That’s causing a real strain and a real pressure not just on the resources that we have but it’s also straining people’s capacity to complete those works.” New South Wales and Queensland are not immune to these growing pains either. “What we see as well with New South Wales and Queensland is that we’re all going through a similar peak in building approvals at the moment which will lead to longer pipelines,” he says. “So not only are we competing against ourselves in Melbourne, but we’re competing against other states nationally as well.” On top of all of this is the rising demand for housing. Victoria’s housing project, the Big Housing Build will deliver more than 12,000 affordable and social housing homes over four years to 2024. The need for social housing alone is currently an additional 1700 new homes per year, an increase of an extra 30,000 homes over the next two decades. It won’t be enough. ▲ It is slim pickings for renters in the Australian market with vacancies down to 1 per cent, prices at record highs and signs the rental crisis will only get worse. Demand is also being fuelled by migration as more people look to rent or to own accommodation. A shortage of purpose built student accommodation means more new and returning students are competing with renters making the rental supply shortage worse. A lack of wage growth has led to less people able to buy housing as house prices increase, moving them to the strained rental market . Lack of sufficient affordable housing has also had the same impact. “The reality is if people are asking for more wages then the costs of the products and services that they’re offering are going to continue to rise,” Smith says. So will any of this change? According to Smith, the demand will continue and the work will be there long term, creating a progressive cost increase. He also suggests thinking outside the box along the lines of retrofitting and re-use. “The inner city market in particular is really lagging behind and that’s something that needs to be fixed straight away,” Smith says. “So is there an opportunity to potentially be reusing some of the developments in that inner ring and really look to reuse those sites in different ways?” He says it could help with sustainability, something that the City of Melbourne also agrees with . “There will be real challenges ahead.”

[+] Big Build, Commonwealth Games to Impact Construction Costs

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