Dive Brief:
- Inflation is expected to linger for hard services contracts such as electrical, plumbing and HVAC, according to CBRE’s 2023 Facilities Management Cost Trends report.
- Even if a 2024 recession weakens upward pressure on contract costs, the report predicts that labor markets “will remain tight and wage growth will drive FM cost growth.” General labor market softening has provided some relief for soft FM service contracts such as those for security, janitorial and landscaping, it says.
- Most North American facilities should see cost growth slow to pre-pandemic levels in the next two years, but the outlook will depend heavily on “difficult-to-predict” external factors like government policy, global conflict and climate and supply chain resilience, CBRE said.
Dive Insight:
The report provides separate data for two of the index’s components — wages and contracts — which it predicts will show growth of 2.5% and 2% in 2024, respectively. Wage growth grew a predicted 4% through the first quarter of 2023, compared with 8.5% in the first quarter of 2023, with slowing wage growth as a major driver of disinflation in early 2023, CBRE said. Service provider contracts are expected to stay inflated, however, as they recoup excess input costs: FM service providers have seen a 29.1% increase in input costs since 2019, compared with a 19.7% increase in final costs.
The report attributes the inflation of hard services costs to labor issues that include high barriers of entry for workers entering the skilled trades, competition with the construction industry and a high degree of unionization. Unions were initially slow to respond to wage pressures but have since seen more dramatic wage inflation as contracts have been negotiated, it states.
As supply chains stabilize and labor market conditions improve, the rate of U.S. facilities cost inflation, which peaked in 2022, is expected to bottom out in the beginning of 2024, returning to a pre-pandemic pace of around 2.5% per year thereafter, the report said. CBRE added that the FM Cost Index is expected to reach 126.7 in the U.S. by the end of 2024, reflecting a 26.7% rise in costs from the start of 2019.
The report gives data on indexes of two other costs that can impact FM costs: the U.S. Energy Price Index, which may indirectly impact FM-related contract costs as service providers factor in more expensive fuel costs into their services, and the U.S. Consumer Price Index. A rebalancing of energy markets this year will directly impact FM budgets and ease input costs for service providers, the report said. U.S. energy costs are expected to grow 8% in 2024, following a 27.1% decrease in 2023 and a 47.6% jump in 2022, CBRE said.
Regionally in the U.S., prices varied depending on fuel source. For example, the report notes that natural gas inflation was most severe in the West, where gasoline price hikes were less dramatic, compared with the Northeast, which saw the lowest gasoline and natural gas inflation in the U.S and a huge increase in electricity prices.
The overall U.S. FM Cost Index was up 7.6% from 2021 to 2022, three times the 2017-2019 average increase of 2.5%. The index saw increases of 4% and 4.9% in the first two years of the pandemic. The company forecasts the 2023 index will end up with 3.3% cost growth.
The report was created through a collaboration between CBRE’s Global Workplace Solutions, Strategic Investment Consulting, Procurement and Facilities Management teams. CBRE says the report, which builds on the inaugural report in 2022, is backed by objective data regarding changes in facilities costs and is intended to enable meaningful early discussions with budget decision-makers.
