The construction industry saw a slight uptick 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 paused, abandoned or have a delayed bid date, closed 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 government pandemic relief and recovery efforts helped stabilize the industry.
Data reveals private sector resilience
The private sector showed stronger resilience compared to last year, with private projects on hold down by 56% and private project abandonments down by 21.7%, according to ConstructConnect.
These figures reflect a return to more stable conditions after the interest rate hikes of 2022 and early 2023, which strained construction activity and raised borrowing costs, said Guckes.
“Private sector activity appears to be responding … to current and anticipated rate changes faster than the public sector,” said Guckes. “Recall that when rates were quickly rising in 2022 and 2023 that the private sector reported much more drastic and faster changes in stress conditions than the public sector.”
On the public side, projects put on hold fell 17.7%, with a smaller decrease of 8.8% in abandonments. That indicates public sector stress levels are falling, albeit at a slower rate.
“Many industry leaders now anticipate only rate cuts in the near future,” said Guckes. “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 profitability climbs.”
Specific stress categories varied, according to the report. Projects on hold and abandonments declined 4.9% and 2.6%, respectively. However, delayed bid activity increased by 9%.
Contractor optimism
Activity should largely pick back up, especially in the commercial sector, as the Federal Reserve continues to slash interest rates.
Compared to October 2023, the Project Stress Index is down 11.6%, said Guckes. That marks a noticeable shift from last year’s heightened stress environment.
“Both [public and private] sectors appear to be benefiting from falling interest rates and an overall positive outlook for the economy,” said Guckes. “Many believe a ‘soft landing’ to be within the Fed’s reach.”