Construction Market Outlook: Navigating Challenges Amid Rising Rates and Labor Shortages

Interest Rates Slowdown but Resilience Prevails
The construction industry in 2024 faces a slowdown primarily due to the Federal Reserve’s interest rate hikes aimed at curbing inflation. Borrowing costs have risen, and while this has impacted residential and nonresidential construction, the market has shown resilience, particularly given the strong growth during 2021-2023. Builders in both residential and nonresidential sectors are experiencing only modest declines, with nonresidential construction maintaining a steadier pace than residential due to solid backlogs and investment in key projects. Despite challenges, the construction industry has not been hit as hard as anticipated, showing overall stability in the face of higher borrowing costs.

Nonresidential Construction Holds Steady: Key Drivers
Nonresidential construction continues to be buoyed by strong investment in certain areas. Data centers, manufacturing plants, and infrastructure projects are expected to drive the sector’s growth through 2025. Manufacturing, especially as companies relocate operations to the U.S. for both economic and geopolitical reasons (such as the Build America, Buy America provision and supply chain diversification), remains one of the strongest growth areas. In addition, infrastructure investment—spurred by federal programs aimed at upgrading energy systems, solar power, and battery storage—continues to provide much-needed stability for the commercial sector. Ken Simonson, chief economist for the Associated General Contractors of America, highlights that these projects will likely sustain demand through 2025 despite some cooling in other sectors.

Residential Construction Faces Significant Headwinds
Residential construction has been more vulnerable to interest rate increases. With borrowing costs at elevated levels, new and existing home prices have remained high, but the overall demand has slowed down. Builders are now adapting by reducing amenities in new homes or offering rate buy-downs to offset the higher interest rates for homebuyers. However, despite these strategies, multifamily housing projects have faced difficulties. A combination of declining rent prices and changes in housing preferences since the pandemic (more people seeking space away from cities) has resulted in reduced interest from developers. Simonson notes that the multifamily sector remains a challenging market, compounded by higher costs for financing and reduced demand in urban living areas.

Labor Shortages Continue to Hamper Construction Efforts
Labor shortages remain a persistent issue for the construction industry, despite a decrease in demand for labor by 33% since mid-2022. While the industry has added significant jobs (688,000 since 2020), contractors are still struggling to fill craft positions. Pay increases have helped somewhat, but the demand for skilled labor continues to outpace supply. As labor shortages are expected to persist, the construction industry may continue facing project delays or increased costs, affecting overall productivity.

Global and Domestic Challenges Impacting the Industry
Looking beyond the U.S., global challenges, particularly in steel markets, could influence construction costs. The decline of the construction market in China, a major global consumer of steel, could impact global pricing, making materials cheaper and potentially affecting pricing structures in North America. The domestic construction sector may also be influenced by potential tariff hikes on foreign-manufactured materials or equipment. Rising tariffs could raise costs, impacting areas within construction reliant on imports or increasing costs for domestic manufacturers, which would then raise prices for construction materials like steel.

A More Optimistic 2025 Outlook
Despite the current slowdown, many in the construction industry are optimistic about the year ahead. The general sentiment is that 2025 could be a more favorable year for the sector. The expected resilience of key construction segments—such as manufacturing, infrastructure, and energy—combined with the possible stabilization of interest rates, creates an outlook for a rebound. Additionally, sustainability factors like decarbonization efforts and the increasing use of recycled materials, such as steel made from 100% recycled content, could further strengthen the market, particularly in the green building sector. As sustainability becomes a focal point for both consumers and builders, construction companies that focus on green and energy-efficient solutions may see an advantage in the years to come.