Leading Economists Predict Continued Construction Slowing in 2025

June 28, 2024|


In late 2023, the Consensus Construction Forecast panelists, as reported by AIA, anticipated that the following four factors would slow commercial construction in 2025:

1) tighter credit conditions driven by long-term interest rates

2) higher construction input costs including labor

3) falling prices for commercial property values in several sectors

4) structural changes in demand driven by remote work practices remaining high, thereby decreasing the need for office space


Halfway through 2024, how are you seeing these predictions bearing out?

Anirban Basu, Chief Economist, Associated Builders and Contractors:  These predictions are playing out precisely as forecasted. Commercial construction has been softening as developers find the cost of capital elevated and as bankers embrace more conservative approaches to real estate lending.

Ken Simonson, Chief Economist, Associated General Contractors of America: The panelists were spot on. Multifamily units (in buildings with five or more units) under construction declined by 10 percent from their peak last July to May, while permits for future projects tumbled 31 percent from May 2023 to May 2024, according to the U.S. Census Bureau.

In addition, vacancy rates for warehouse and office construction have risen to multi-year highs, according to several commercial real estate data firms, and rents are slipping in numerous markets for all three property types. These conditions, along with tighter lending conditions and higher financing costs, will keep many projects on hold or canceled outright.

Looking at key economic indicators from this spring, do you anticipate that the slowing of commercial construction in 2025 will be less severe, as predicted or more severe?

Basu: I expect commercial construction’s slowdown to persist in 2025, and perhaps become more severe as lenders realize the large size of declines in property valuations in certain categories of commercial real estate, particularly older office buildings in historic central business districts.

Simonson: I agree. The slump in these categories is likely to persist and probably worsen. Interest rates have stayed and will stay higher for longer than most analysts expected at the beginning of the year, and office occupancy has not improved.

However, consumer spending has held up well, giving a boost to hotel, entertainment and services-related retail projects. Even goods retailers have done well in markets where individuals have moved to or are now working near.

Which market sectors are still showing growth and which are slowing down the most?

Basu: The sectors that are exhibiting the fastest growth include data center construction, which is driven at least partially by the proliferation of large language models, manufacturing construction, which is driven by the reshoring of industrial capacity and associated megaprojects, and infrastructure and green energy-related construction, both of which are driven by federal funding and incentives.

Commercial construction, on the other hand, has slowed in recent quarters as the e-commerce-related boom in warehouse construction observed in recent years winds down.

Which regions are showing the most potential for growth, which are slowing the most and why?

Basu: The New South continues to show the most potential as corporate and household populations continue to rise due to a confluence of warm weather, lower cost of living and buzzy cities like Nashville, Atlanta, Tampa, Dallas and Miami. There are some communities in the North that also remain attractive, including Columbus, Ohio, and Indianapolis for various reasons. Much of California continues to be soft economically along with certain large Midwestern communities.

Simonson: From April 2023 to April 2024, 39 states added construction employees. Most months have had similar patterns, with some variation in the states that are not adding workers. States that have been persistently weak include ones with multiple years of population declines (NY, IL) or slowdown (CO, OR, WA, ND).

A decrease in interest rates could free up more funding/lending for construction. Do you have any sense of when the federal government might address this?

Basu: The Federal Reserve will begin to reduce rates this year, once or twice, and initiate a more concerned effort to diminish borrowing costs in 2025. That will set the stage for renewed construction spending momentum that year and beyond.

Simonson: I have long been more skeptical than most financial analysts that the Federal Reserve’s Federal Open Market Committee would cut its interest rate target soon. My current expectation is that they will wait until at least December, and perhaps early 2025, before reducing rates. Much will depend on seeing persuasive evidence that their preferred measure of inflation has come down to 2 percent and stabilized there. That target will not be easy to achieve and stick to, despite rapid progress from the 9 percent inflation in mid-2022 to 3 percent, give or take, today.

How can contractors prepare for this continued slowdown?

Basu: Contractors invested in soft segments and/or geographies should be raising cash and communicating with financial partners, including to expand lines of credit. These are defensive measures designed to deal with the possibility of sharper loss in activity going forward.

Simonson: Contractors should pay attention to supply and demand indicators in each area and market segment that they are interested in. While a downturn area may see a huge decline in office, retail, and apartment construction, there could be opportunities in nearby suburbs. While warehouse construction is likely to shrink nationally, locations near new manufacturing plants or temperature-controlled facilities will be in demand. More broadly, pivoting away from developer-financed projects to data centers, manufacturing plants, renewable energy and infrastructure projects should provide more opportunities for growth.

When might we start to see a more robust U.S. construction market?

Basu: One would think that activity will pick up in 2026 and beyond as interest rates fall and more projects are initiated.

Simonson: I think 2024 will end with more construction put in place than in 2023, but with rotation among project types as described above. Growth should continue in 2025, with possible recovery for multifamily construction beginning late that year.


Anirban Basu is chief economist for the Associated Builders and Contractors.

Ken Simonson serves as the chief economist for the Associated General Contractors of America.




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