Second staircase requirement set to cool tender prices

9 Jun 23 Industry economists are warning that a construction market slowdown is looming, with London residential buildings likely to face delays.

Latest quarterly report from cost consultant Arcadis predicts that construction costs will rise by 3-4% in 2025 overall, with variations from 2% for London building work to as much as 7% for infrastructure projects.

Among issues softening the market in London is the introduction of a mandate for second staircases in high-rise (30+ metres) residential buildings by the Greater London Authority. Arcadis says that this means delays of up to nine months for such projects currently in procurement as redesigned are undertaken.

The impact of this will likely spread to regional markets once the staircase requirement is confirmed nationwide, Arcadis says.

“Our view is that loss of workload associated with second staircase delays is a material factor influencing market conditions in London, with an anticipated reduction in tender price inflation to 2% in 2023,” it says. “The current and future slowdown in London’s workload means that we do not expect any differential in inflation between regional and London building markets in the medium term.”

More broadly, Arcadis says that wider disruption brought on by the invasion of Ukraine have finally started to bite, with quarterly new orders data falling across multiple sectors.

Construction new orders were down for a second quarter in a row, and this time falling by a £1.8bn (12.4% in volume terms). House-building fell by than 18% in the second quarter, knocking £831m off the value of orders.

Of greater concern, according to Arcadis, was the commercial sector’s order book, which was down by £872m (22.3% in real terms). One bright spot, however, is commercial retrofit works – a record 1 million sqft of refurbishment has started in London since November 2022, according to Deloitte’s London Office Crane Survey.

Simon Rawlinson, head of strategic research & insight at Arcadis, said: “Even if 2023 turns out to be better than forecast, we will see a significant slowdown compared to the past two years. Our view is that building workload will stabilise in 2024 at new but mostly reduced levels and that the greatest area of uncertainty will be the rate of growth of work to power and water networks.”

Arcadis market intelligence lead Ian Goodridge said: “Even as market conditions deteriorate, the resolution of problems like material shortages is a positive development. A more stable business environment will allow construction businesses to plan for changing market conditions with greater confidence.”

But while Arcadis has slightly reduced its real estate tender price forecasts because of the second staircase issue, rival firm Turner & Townsend has puts its up.

Turner & Townsend has slightly increased its tender price inflation forecasts for real estate, up to 3.7% and 2.7% in 2024. The predictions for infrastructure tender price inflation in 2023 are unchanged from its spring forecasts, at 5.5%, but with lower private investment than pre-pandemic levels and the recent resequencing of major projects by the government in the budget, this could mean a cooling effect longer term, and so the 2024 estimation has been revised downwards to 4.5%.

Martin Sudweeks, UK managing director of cost management at Turner & Townsend, said:

“Construction is continuing to feel the aftershocks of the pandemic and global inflationary pressures, but the current outlook goes beyond that – and government and industry need to face up to the structural problems our sector is facing. The UK wants higher growth, and a greener, more productive economy. Construction is at the heart of achieving that. But it will remain hard to achieve while we face underinvestment in skills and capacity, and a lack of clarity on a future pipeline of committed projects.

“For firms in the eye of the storm, putting the right procurement and digital strategies in place will be essential to mitigating the risks. Skills gaps must be identified early, and the availability of key personnel locked in. Contractors’ financial status must be rigorously evaluated, along with better management of data and real-time reporting to continually assess the progress and performance of projects. Our industry faces a very difficult climate, but as the last few years have shown, we are resilient, and our ability to innovate and creatively rethink our ways of working will help us emerge ever stronger.”

Arcadis tender price forecasts