CONSTRUCTION COSTS SINCE 2022: The Impact on Insurance, Property Values and Build-versus-Buy Decisions

Since approximately January 1, 2022, property owners, developers, contractors and appraisers across Vancouver Island have experienced a substantial increase in the cost of constructing buildings and completing site improvements.

While the most dramatic period of construction-cost inflation may have passed, prices have generally not returned to their previous levels. Instead, the market appears to have established a materially higher cost baseline.

This affects much more than the budget for a new building. Higher construction costs can influence insurance coverage, development feasibility, property values and the decision to build, purchase or rent real estate.

Four Local Examples

Recent construction budgets and project information reviewed by Jackson & Associates Ltd. illustrate the magnitude—and variability—of these increases.

A proposed 2,250-square-foot speculative house on Crown Isle Boulevard had an estimated construction cost of approximately $243.75 per square foot in late 2021. A 2026 construction budget for the property indicated approximately $306.87 per square foot, representing an increase of approximately 26%.

The estimated cost of a pre-engineered steel building package for a 12,000- to 16,000-square-foot industrial building increased from approximately $87.50 per square foot in 2022 to $108.33 per square foot in 2026. This represents an increase of approximately 24% for the building structure, exterior walls, cladding and roof package.

Roofing costs have also increased materially.

The cost of installing a torch-on roof surface on a three-storey building increased from approximately $13.39 per square foot in 2020 to $18.35 per square foot by fall 2025, an increase of approximately 37%.

The largest increase was observed in a municipal infrastructure budget involving approximately 650 metres of road reconstruction in Comox. The comparable road, sidewalk, storm sewer and sanitary sewer components increased from approximately $2.04 million in 2022 to $5.21 million in 2026. Excluding the water-line component, for which the 2026 spreadsheet contained no allowance, this represents an aggregate increase of approximately 155%.

These examples are project-specific and should not be interpreted as a universal construction-cost index. However, they demonstrate why an estimate prepared several years ago may no longer provide a reliable indication of current project costs.

Construction Costs Extend Beyond the Building

Owners often focus on the cost of the main building while overlooking the cost of site improvements and indirect expenses.

Depending on the property, total project costs may also include:

• Excavation, grading and site preparation

• Underground utilities and drainage

• Asphalt paving, curbs and sidewalks

• Retaining walls, fencing and exterior lighting

• Landscaping

• Architectural and engineering fees

• Permits and municipal charges

• Demolition and debris removal

• Contractor overhead and profit

• Financing, contingencies and applicable taxes

On commercial, industrial, institutional and multi-residential properties, these items can represent a significant portion of the total replacement cost.

The Insurance Risk

A property’s market value is not the same as its insurable replacement cost.

Market value reflects what the property would likely sell for under prevailing market conditions. Replacement cost considers the current expense of reconstructing the insured improvements following a loss.

A building purchased for $2 million is not necessarily adequately insured for $2 million. Similarly, its assessed value does not establish the amount required to reconstruct it.

Replacement-cost coverage may need to account for current labour and material costs, demolition, debris disposal, professional fees, permits, building-code requirements, site-access constraints, exterior improvements and escalation during the reconstruction period.

Owners who have renewed the same insurance limit year after year may find that their coverage has not kept pace with actual rebuilding costs. Insurance limits and policy terms should therefore be reviewed with a qualified insurance professional. Larger or more complex properties may also benefit from an independent replacement-cost appraisal.

Market Value Does Not Rise Dollar-for-Dollar

Higher construction costs do not automatically result in an equivalent increase in market value.

An older building may sell below its replacement cost because of depreciation, functional limitations, deferred maintenance, market rents or investor demand. Conversely, modern and highly functional buildings may command a premium because buyers recognize how expensive and time-consuming they would be to reproduce.

Replacement cost is an important valuation benchmark, but market value remains governed by supply, demand, income-generating capacity and the availability of competing properties.

Build, Buy or Rent?

Rising construction costs have materially changed the build-versus-buy calculation.

Building provides a customized facility but introduces approval, financing, scheduling and cost-overrun risks. Buying an existing property may provide faster occupancy and a cost below replacement, although renovations and deferred maintenance must be considered. Renting reduces the initial capital requirement and offers flexibility, but provides no ownership interest and exposes the occupant to future rental increases.

There is no universal answer. The correct decision depends on current construction costs, available properties, financing, operating requirements and long-term objectives.

What is clear is that budgets, insurance estimates and feasibility studies prepared in 2022 should not be assumed to remain reliable today.