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After months of speculation, the Federal Reserve cut interest rates in September by half a percentage point and a boost in new construction is expected as early as next year, economists say.
“With their attention now turned to avoiding a further cooling of the labor market, Federal Reserve policymakers received fresh evidence that inflation is still easing, paving the way for the first interest rate cut on third quarter of 2024,” says Paul Brussow, president of Rider Levett Bucknall. . “New construction will be more in demand as the Fed loosens its monetary policy.”
The Dodge Construction Network reports that the dollar value of construction starts is up 4% in the first eight months of the year, compared to the same time period in 2023. “Now that the Federal Reserve has begun to rates, the construction industry should begin to Feel relief,” says Richard Branch, chief economist at Dodge. [owners and developers] feel comfortable moving these projects forward to begin with. Starts should show stronger and more consistent growth in the first quarter of 2025.”
The single-family house is starting to grow
Home starts rose 8% in dollar terms through August of this year, according to Dodge. The increase is due to a significant boost in single-family housing, at a rate of 19% since last year. Multifamily starts are down 10% over the same time period, which Branch attributes to higher availability and vacancy rates among existing units. The largest multifamily housing projects to break ground in the past two months were the $332 million renovation of the West Brighton Apartments I and II in Staten Island, New York, and the Music apartment tower $300 million Row Albion in Nashville.
Non-residential starts are 3% higher through August, compared to 2023. Institutional starts, particularly in education and health care, are the “main driver,” Branch says, rising 13%. Commercial startups are generally flat; Data center and hotel startups are up, while warehouse and traditional office startups are in decline. In this sector, the largest projects that began work in July and August were the $2.6 billion modernization and expansion of Terminal 3 at San Francisco International Airport and Novo Nordisk’s expansion of $2.1 billion in Clayton, North Carolina.
In the non-construction sector, “starts appear to be stumbling,” down 1% in the year to August, Branch says. “However, the decline is centered on a slowdown in utility/gas starts [-17%] while public works projects are experiencing modest growth [at 5%].” The $1.5 billion Revolution Offshore Wind project off the coast of Narragansett, RI, and the $819 million Potomac River Tunnel in Washington, DC, are the largest non-building projects to begin in last two months
Wages remain high
“The start of the monetary policy easing cycle in the US will eventually lead to a return to strength in residential construction and, consequently, demand for lumber.”
—Luke Lillehaugen, Senior Economist, S&P Global Market Intelligence
While the Federal Reserve’s rate cut will help ease some construction costs, labor shortages continue to plague the industry. “The underlying lack of skilled labor will likely continue into the future,” says Brussow. “Rising wages in the construction industry are the result of a persistent shortage of skilled labor, which increases the overall cost of projects.”
Michael Guckes, chief economist at ConstructConnect, shares a similar sentiment regarding high labor costs. “Global construction labor prices are rising…by 4.4% more [year-over-year]. In some segments, such as remodeling, we’re seeing hourly wages increase by more than 7%,” says Guckes. “Construction workers also average 39 hours per week on the job, nearly 5 hours more than the average private sector worker. Trends in wages and hours worked suggest that labor is and will continue to be the dominant driver of construction costs, at least in the short term.”
up and down
“New construction will be more in demand as the Fed loosens its monetary policy.”
—Paul Brussow, President, Rider Levett Bucknall
According to S&P Global Market Intelligence, lumber prices have seen a lot of movement so far this year, both down and up. “Softwood lumber prices have bounced around a lot in the first three quarters of 2024,” says Luke Lillehaugen, senior economist at S&P. “This is expected to continue through the end of the year before more typical price patterns return in 2025.”
S&P Global Intelligence’s third-quarter outlook predicts softwood lumber prices will decline 6% overall this year before rebounding 4.6% in 2025. “The start of the monetary policy easing cycle in the US will eventually recover the strength of residential construction and, consequently, the demand for wood. “But this process will take time and it is not likely to see significant impacts on prices before the middle of 2025” .
