Construction Economic Outcomes and Trends

 Written by CS Market Research Manager, Curt Fessler

If I had to pick a phrase to describe the state of the construction economic outlook for 2025 today, it would be, “There is no crystal ball for 2025”. The US and construction economies are complex machines with many inputs, outputs, and other forces acting upon them. In economics, like in physics, every action has a reaction. Managing these forces affects the balance. And while there is no “crystal ball” to show us the future, we can gather insight by learning from the past and observing the present.

A Look Back at 2024:

For the construction market, election years typically have a “wait and see” attitude. Everyone waits for election results and gauges the next administration’s priorities. This year was no different. There was still a “wait and see” mentality, but there were also a lot of dynamics moving under the hood. Let’s take a look:

Inflation
For most of the year, elevated interest rates instituted to cool inflation had their desired effect. They brought inflation down to 2.6%, still shy of the Federal Reserve’s target of 2%. Despite the elevated rates, the economy remained strong as GDP grew faster than expected and the labor market thrived.

The Labor Market 

The labor market has remained healthy, although it has shown some cracks and volatility; unemployment reached a low of 3.4% in April and a high of 4.3% in July. Construction employment has remained strong, with more than 200 thousand jobs added since last year.

High Interest Rates

The residential sector was the first to feel the effects of high rates in the early funnel. As expected, we also saw a flattening out of many other nonresidential market construction starts, with the exception of education and data centers. Elevated rates caused many delayed or abandoned projects.

Starts In Other Sectors

We also saw manufacturing starts fall 40%, bringing them back in line after the initial post-pandemic boom. The single- and multi-family housing markets have also been hit hard due to high interest rates over the past two years despite a housing shortage. Civil and infrastructure spending has remained strong due to the Infrastructure and Jobs Act.

Construction Spending
Despite those less favorable lending conditions, elevated material costs (roughly +40% since 2019) and a thin labor market, construction spending has remained strong in most nonresidential and non building segments.

Construction, especially nonresidential construction, is a lot like a freight train. Due to project sizes and timelines, it takes time to speed up and its momentum and mass take just as long to slow down. Despite high interest rates weakening the early funnel, actual spending levels have remained elevated and growing (even on an inflation-adjusted basis for many markets) thanks to a robust backlog, long nonresidential project horizons and investment in key sectors such as data centers and civil infrastructure.

2025 Trends We Are Watching

Interest Rates
Interest rates have remained elevated since 2022 and we are just now starting to see relief in the form of rate cuts from the end of 2024 and into 2025. Dodge Data and Analytics speculates that a cumulative 1.25% reduction in the Federal Funds Rate should spur acceleration in construction starts. Based on current estimates, we believe we will hit that threshold in early 2025 and we can begin to get those flattened-out construction start levels back on the rise!

As spending begins to cool in 2025 from two years of high interest rates, we hope to see the front end of the project pipeline heating back up to replenish backlogs.

The New Administration

It remains to be seen how the recent re-election of President Donald Trump will affect the construction industry. Three campaign promises that could disrupt construction are mass deportation, tariffs and deregulation. The Trump campaign has also pledged to reduce corporate tax rates further, reduce regulations, and push for lower interest rates. Those changes could benefit construction by spurring construction investment, providing more favorable lending and allowing faster permitting. Additionally, proposed tariffs could result in additional demand for manufacturing onshoring.

However, as mentioned, in economics, every action also has a reaction. So, while new tariffs could spur domestic manufacturing and job creation, they can also cause retaliatory tariffs, trade wars and government bailouts of disaffected industries. Tariffs are also inflationary, which will cause some input cost escalation, at least until supply chains adjust. We will have to wait and see.

It's also important to mention the potential effects of mass deportation of undocumented immigrants to several industries like construction, agriculture and hospitality. Like any policy implementation, many effects will be determined by the scope, scale and schedule of policy changes. Since these policies are still in development and will need to work their way through Washington, this hinders our ability to accurately forecast what construction in 2025 and beyond will look like. No crystal ball…

Extend and Pretend
Another thing we have been closely watching is “Extend and Pretend” in commercial lending markets. We first observed this in the residential market in the lead-up to the 2007-2008 global financial crisis. “Extend and Pretend” refers to a practice where lenders extend the loan’s maturity date while ignoring problems associated with the loans, such as missed payments. By “pretending” the loan is performing well, they delay the need to write off the debt, potentially causing significant future financial issues.

We are now seeing something similar occur with Commercial Real Estate (CRE) loans. It’s important to remember that CRE loans, unlike home mortgages, have shorter terms and must be refinanced more frequently.

In a post-pandemic world, commercial/office vacancies are high; the properties are worth less; the owners are in financial peril and, in many cases, wouldn’t qualify for refinancing, especially at high rates. The New York Fed has recently warned that $1 trillion worth of CRE loans are hitting the maturity wall in 2027 and these loans and devalued assets represent 27% of bank capital! This directly affects the financing conditions for new construction projects. However, if rates continue to edge downward, many of the existing loans will be able to be refinanced. Still, not all loans will be refinanced and banks may be sitting with several bad assets. We will continue to monitor this situation throughout next year.

Residential Home Affordability 

Residential home affordability is another area where we hope lower interest rates can ease some pressure. Due to high rates, sales and construction of new single- and multi-family units have slowed, causing home prices to balloon. Average home prices are up 76% over the prior peak in 2007, causing an affordability crisis for many.  

 
As always, a lot is affecting the economy and construction in particular. Here’s hoping that you have a wonderful 2025 and that easing interest rates will take some pressure off our residential and nonresidential construction and real estate markets!

Curt Fessler is the Market Research Manager at Construction Specialties, in charge of economic and construction industry analysis and forecasting. He gathers market insights, analyses material and product pricing, studies trends and conducts competitive analysis. Curt has been with CS for more than 15 years in several product delivery and marketing leadership roles.