Original article written by Alisa Zevin on enr.com
Experts share positive outlook for next year amid falling interest rates.
As interest rates finally begin to ease, economists are fairly optimistic about how the overall construction market will fare in the coming year.
Following the total 75 basis point cut so far this year, an additional cut of 25 basis points is expected in December. The 100 basis point reduction in 2024, will be joined by another predicted for 2025, says Richard Branch, chief economist at Dodge Construction Network.
The Dodge forecast estimates an 8% increase in the dollar volume of starts by the end of 2024, with an additional 8.6% predicted for 2025. Residential work is expected to end the year up 7.8%, with another 11.5% increase next year. While multifamily starts are down this year, Dodge predicts a rebound in 2025 as vacancy rates have risen over the past year. “This is still a fairly robust market,” Branch says.
Non-residential starts are up 5.7%, and are set to rise an additional 5.9% next year, spurred by hotels, retail and health care. Non-building construction starts rose 11.2%, and are forecast to increase another 8.8% in 2025 as federal funds continue to boost highway and bridge construction.
While market signs are trending in the right direction, “rates, even now, are still higher than they’ve been over the past couple of years,” Branch says. “It’s probably going to take about 125, maybe even 150 basis points of cuts before we start seeing a more consistent growth in the economy and more consistent growth in the construction market.” Branch predicts the economy will begin to see that movement by mid-year.
“We know that construction activity, for the most part, has been moving fairly sideways over the last [six months],” he says. Rate cuts at that level are “what’s really going to get the gears kind of turning here.”
Looking Forward
The U.S. economy "continues to do really well, 3% growth year-over-year, [which] based on historical standards, is a fantastic place for us,” says Michael Guckes, chief economist at ConstructConnect, which reports that despite this, total construction spending is down 0.2% year-over-year in 2024.
“Due in large part to financial reasons, we aren’t seeing parallel growth in construction,” he says, pointing, as Branch did, to high interest rates. Still, there are many sectors doing “tremendously well, [but their] relatively smaller dollar size is not enough to push up the total nonresidential result.”
For next year, ConstructConnect expects spending to rebound, with residential up 12% and non-residential increasing 8%. Total construction spending is predicted to rise 8.5%.
Jay Bowman, partner at FMI Consulting, says he feels “fairly positive” about the market for next year. “I know there’s a lot of negative talk out there [regarding inflation and labor shortages], but I think the industry is doing pretty good, all things considered.” The FMI construction put-in-place forecast expects an overall 5.4% increase in construction spending for 2024 and an additional 2% gain in 2025.
However, Bowman’s optimism comes with a caveat. “This idea that there’s this one U.S. construction industry is misleading,” he says, adding that FMI tracks 19 different segments that are “moving in different directions.” The FMI forecast points to single-family housing and transportation being among the strongest markets.
Spending in transportation construction is predicted to increase 5.3% in 2024 and 4.2% in 2025. “Transportation construction continues to be strong,” says Bowman, pointing to “really major projects” at Los Angeles International Airport, and LaGuardia Airport and John F. Kennedy International Airport i New York City. The federal infrastructure law "is obviously helping with that,” he adds.
In addition to multifamily, Bowman points to hotels and offices as “lagging in terms of growth prospects over the next five years.” Still, he adds: “Just because a market is down does not mean it’s dead. I haven’t seen a market go to zero yet.”
One market moving in the positive direction is health care, says Bowman. FMI estimates put-in-place spending in this sector to increase 1.3% in 2024 and 2.6% in 2025. The rise of medical office buildings in addition to hospitals accounts for much of this growth, with hospital construction now only 40% of overall sector spending.
Manufacturing “obviously has been the darling of construction for the last couple of years,” says Bowman. “If you look at the growth between 2022 and 2023, I have never seen a segment grow like it has.” Spending is expected to increase 21.1% in 2024, with another 5.3% boost in 2025.
