Volume 29, Number 1, 2007 of the Journal of Real Estate Research

The Secular and Cyclic Behavior of "True" Construction Costs

Abstract: Current construction cost indices typically are derived by applying national weights to local costs for materials and labor. In this study, construction cost indices are developed that are
based on actual contractor tenders for projects. As such, they incorporate full variation in factor proportions, as well as factor costs, contractor overhead, and profit. Cost indices are produced
for two product types, office and multi-family residential, in six different MSAs using F.W. Dodge project cost data from 1967 through the first half of 2004. Standard ‘‘hedonic’’ analysis is
applied to control for variation in project scale and features to extract the true time trends in costs for each market. The findings indicated that real construction costs generally have fallen
slightly over the last 35 years. In addition, no correlation is found between costs and building activity. Causal (IV) analysis implies that the construction industry is elastically supplied to local real
estate markets, with any ‘‘excess’’ profits going to land and developer entrepreneurship. This is consistent with the traditional ‘‘urban land economics’’ literature..