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.
The Seattle regional office reported a slight cost increase of (+0.23%), for the quarter, joining other Mortenson offices who saw a minor uptick in costs, including Portland (+0.19%), Chicago (+0.40%), and Phoenix (+0.67%). Offices showing cost decreases included Minneapolis (-0.24%), Milwaukee (-0.34%) and Denver (-0.73%).
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%.
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. The Seattle region did not see any significant supply chain issues during the quarter, particularly with the extension of the International Longshoremen's Association labor contract for the Gulf & East Coast ports. Globally, ocean freight container rates continue to fall, and domestic over the road trucking remains readily available with rates at historic lows.
For Q3, the top three material packages seeing price decreases reported by the Seattle office were Suspended Acoustical Ceilings (-6.6%), Roofing (-3.3%), and Reinforcing Steel Material (-3.3%). Trade partners across the Denver region reported increased competition on projects, with competitive bidding beginning to cut into fees.
Nationally. 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. Not so in Seattle, where trade partners say labor is readily available.
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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 2.0% in Seattle.
CONSTRUCTION EMPLOYMENT
Building construction employment in the Seattle metro region totaled 28,700 in September 2024, a decline of 300 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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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.
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.
“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.”
In the Seattle market, increased competition for subcontracts is tightening margins, and competitors new to the market are likewise putting pressure on GCs as they bid for projects. While active bidding has yet to create a negative escalation, it’s likely that project owners are getting a fee discount due to strong competition at both the GC and Subcontractor levels.
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:
Jared Chapman
Chief Estimator
jared.chapman@mortenson.com
425.497.6648
Nate Jenkins
Director of Business Development
nathan.jenkins@mortenson.com
425.497.6610
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.