The increase in project abandonments indicates continued turmoil in the sector

Dive brief:

• The stress index of the project — a measurement of construction projects with a delayed bid date, or that have been stalled or abandoned, rose 1.7% in the past 30 days, according to a March report from ConstructConnect, a construction information and technology solutions provider with based in Cincinnati.
• WOrk placed on hold rose 11% over the 30 days to March 2, said Michael Guckes, senior economist at ConstructConnect. Compared to the same period in 2023, the project stress index continues to increase by 13%, Guckes added, indicating continued uncertainty in construction.
• “At some point the market must rebalance and find its steady state. When that happens, I think the PSI trend will return to a generally horizontal orientation once again,” Guckes said in an interview. “Unfortunately, this may not happen quickly given the Fed’s latest decision to keep rates high.”

Diving knowledge:

There were some positives in the short term. For example, backlog bid activity and abandoned projects fell 13% and 16%, respectively, from a month ago.

But public and private sector projects they continue to show different patterns, according to ConstructConnect. While both face increasing delays and cancellations, public projects, because of their funding mechanisms, remain in a comparatively stronger position to drive work forward.

In the public sector, which includes infrastructure works, stalled projects rose about 14% from the same week a year ago, the report said. Projects in a deteriorating financial environment would likely be shelved at first as property owners try to evaluate alternatives before they have no choice but to abandon a project, Guckes said.

Abandoned public projects rose 70 percent in the week ending March 2 compared to the same week in 2023. Guckes said many municipalities and states could be looking at the high current construction costalong with high municipal bond rates, and simply realizing the costs are too great to begin with, Guckes said.

However, most of it is still waiting activity in the public sector to progress as the year progresses.

“There are a large number of projects that must be implemented in the future. Projects that immediately come to mind include power generation and transmission, water, sewer, road and bridge,” said Guckes. “These types of projects simply have to go ahead for the welfare of society, regardless of the budgetary sacrifices that will have to be made elsewhere.”

In the private sector, stalled projects nearly doubled compared to the same week a year ago, an increase of about 94 percent, Guckes said. Project abandonments increased by 9% during the same time period.

Guckes noted that while a 9% jump may not be worrisome on the surface, it comes after a large increase in first-quarter private project abandonments in 2023. If you compare the abandonments from the last week with the same period in 2022, abandonment activity increased by 50%. according to ConstructConnect.

A recent example was when the New York pharmaceutical giant Pfizer shut down construction earlier this month at a 270,000-square-foot manufacturing facility in Everett, Washington. The move will affect approximately 120 employees who were setting up the site, the company said.

And the project’s dropout rate could also continue to rise, Guckes said.

“If, for example, you’re in the office segment today, what you’re seeing are high vacancy rates, falling prices for existing office buildings and banks being afraid to add more commercial office debt to his books,” Guckes said. “In this collection of conditions, there may not be a path forward for many of the projects that generally fit this criteria.”

To improve private construction projects, Guckes says you need to keep an eye on financial indicators.

“I want to see the loan officer surveys point to a greater willingness to return to commercial real estate lending, and for commercial and industrial loan delinquency metrics and commercial real estate credit to stop rising since they hit lows in 2022,” Guckes said. “The pressure will come off the construction sector once the strength in existing commercial real estate prices is renewed.”