The construction sector saw a slight rise in market stress last month, despite continued improvement in overall project abandonments, according to the latest report from Cincinnati-based ConstructConnect.
The project stress index, a measure of construction projects that have been halted, abandoned or have a delayed bid date, ended October up 0.8% from the previous month. That follows a recent trend of modest increases since the index hit a three-year low in August, said Michael Guckes, chief economist at ConstructConnect.
The PSI now sits around the 2021 stress average, a time when the government’s recovery and pandemic relief efforts helped stabilize the industry.
The data reveal the resilience of the private sector
According to ConstructConnect, the private sector showed stronger resilience compared to last year, with private projects stalled by 56% and private project abandonments by 21.7%.
Those numbers reflect a return to more stable conditions after interest rate hikes in 2022 and early 2023, which strained construction activity and raised borrowing costs, Guckes said.
“Private sector activity appears to be responding … to current and anticipated rate changes more quickly than the public sector,” Guckes said. “We recall that when rates rose rapidly in 2022 and 2023, the private sector saw much more drastic and rapid changes in stress conditions than the public sector.”
On the public side, abandoned projects fell by 17.7%, with a smaller drop of 8.8% in abandonments. This indicates that stress levels in the public sector are falling, albeit at a slower pace.
“Many industry leaders now only anticipate rate cuts in the near future,” Guckes said. “This change in the expected direction of interest rates will bring renewed optimism to future owners and developers as the cost of commercial real estate debt falls and expected returns rise.”
The specific categories of stress varied, according to the report. Suspended and abandoned projects decreased by 4.9% and 2.6%, respectively. However, backlog activity was up 9%.
Optimism of the contractor
Activity should pick up to a great extent, especially in the commercial sector, since the The Federal Reserve continues to lower interest rates.
Compared to October 2023, the project’s stress index is down 11.6 percent, Guckes said. This marks a marked change from last year’s heightened stress environment.
“Both [public and private] Sectors appear to be benefiting from falling interest rates and a positive overall outlook for the economy,” Guckes said. “Many believe a ‘soft landing’ is within reach for the Fed.” .
