Non-Residential Construction Outlook Optimistic as Interest Rate Cuts and Flat Material Costs Elevate Industry Sentiment
The overall outlook for non-residential construction is optimistic as successive 0.25% cuts to the Fed Funds Interest rate, along with stable construction material costs and a healthy backlog, position the industry for growth in project starts by the first half of 2025.
Nationally, nonresidential construction costs tracked by the Mortenson Quarterly Cost Index for the 3rd Quarter 2024 remained essentially flat, with only a nominal increase of +0.05%, marking a return to relatively flat cost movement after pre-negotiated labor rate increases pushed Q2 costs up +1.24%.
Mortenson regional offices reporting cost decreases this quarter include Minneapolis (-0.24%), Milwaukee (-0.34%) and Denver (-0.73%), while offices showing slight cost increases include Portland (+0.19%), Seattle (+0.23%), Chicago (+0.40%), and Phoenix (+0.67%).
Construction material costs fell 0.5% in the third quarter and have decreased by 0.8% over the past twelve months as inflation cools and supply chains show some resilience and reliability for most products and materials. Ocean freight container rates continue to fall, the International Longshoremen's Association labor contract for the Gulf & East Coast ports has been extended into 2025, and over the road trucking remains readily available with rates at historic lows, even despite port disruptions and the impact of Hurricanes Helene and Milton.
For Q3, the top three material packages seeing price decreases were Reinforcing Steel Material (-4.8%), Wood Doors (-3.7%), and Structural Steel and Metal Decking Material (-2.6%).
Trade partner work increased by 0.5% during the third quarter, with plumbing contractors reporting the highest spike in material costs (+6.1%). Labor costs increased by 4.2%, and have increased 5.4% over the last 12 months, contributing in part to a similar year over year cost increase of 3.3% for trade partner work.
While the Dodge Momentum Index, which benchmarks nonresidential construction planning, slipped 4.2% in September and 5.3% in October to close the quarter, economists there remained upbeat on starts increasing in early 2025 as interest rate cuts begin to stimulate projects through the planning process.
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CONSTRUCTION COST INDEX
Nationally, the Mortenson Cost Index remained essentially flat in the 3rd quarter of 2024. Over the past year, costs have increased 1.7% nationally and 3.1% in Milwaukee.
CONSTRUCTION EMPLOYMENT
Construction employment in the Milwaukee metro region totaled 38,200 in September 2024, an increase of 100 workers compared to September 2023.
Source: Bureau of Labor Statistics
MATERIAL PRICING CHANGES
Construction material costs have stabilized over the past twelve months as inflation cools and supply chains show resilience.
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Despite the decline (influenced by a normalization in data center planning, which surged in the first half of the year), the index remains at robust levels, said Sarah Martin, associate director of forecasting at Dodge Construction Network, who noted that the index closed the quarter 13% higher than October 2023.
After several mega projects in the energy sector pushed the value of construction starts up 10% in May, total starts fell back 19% in June, to a seasonally adjusted annual rate of $1 trillion, according to the Dodge Construction Network. Beyond commercial construction, single-family residential starts remain robust, and are a positive forward-looking indicator of future demand across all construction sectors.
“Owners and developers remain confident in next year’s market conditions,” Martin said, “and the planning queue remains poised to spur stronger construction activity in 2025, following deeper rate cuts by the Fed.”
Although the Associated Builders and Contractors likewise reported a slight decrease in the average construction backlog in October, the year-over-year backlog remains unchanged at 8.4 months. Additionally, contractor confidence in both sales and staffing conditions has improved.
“Like much of the economy, the construction industry remained in some semblance of a holding pattern in October as project owners waited for election outcomes and for interest rates to decline further,” said ABC chief economist Anirban Basu. “Despite this wait-and-see attitude, contractors remain upbeat about the next two quarters.”
The Mortenson Construction Cost Index shows essentially flat costs for the 3rd Quarter 2024, continuing a period of negligible or slower cost increases experienced across the 12 months prior to Q2. With continued interest rate cuts and stable material costs, we expect overall spending on non-residential construction to increase as conditions across the next two quarters continue to improve. We recommend customers continue to gauge their market-specific challenge of labor procurement while considering project starts on an opportunistic basis across the remainder of 2024 and into the first quarter of 2025.
For a more specific update or questions regarding this report, please contact:
Steve Resset
Chief Estimator
steve.resset@mortenson.com
262.879.2578
Jeff Gruhn
Vice President, Project Development
jeffrey.gruhn@mortenson.com
262.879.2531
About this report: Mortenson tracks and reports on seven metropolitan areas in the U.S. including Chicago, Denver, Milwaukee, Minneapolis, Phoenix, Portland, and Seattle. The Mortenson Construction Cost Index is calculated quarterly by pricing representative non-residential construction projects in various metropolitan areas. It is part of a portfolio of industry insights and market studies provided by Mortenson.