More U.S. construction projects are being abandoned before ground is even broken due to concerns over near-term material price increases, labor shortages and persistently elevated interest rates.

Since the beginning of the year, preconstruction abandonment activity has surged by 41%, far outpacing the 3.5% increase in bid date delays and the 19% decline in on-hold activity, according to the most recent Project Stress Index (PSI) from Cincinnati-based ConstructConnect.

In March alone, abandonments rose 9.5%, which more than offset declines in bid date delays (down 0.7%) and on-hold activity (down 8%). Overall, the PSI composite in March closed at 113.7, marking a 1.1% increase month-over-month. The PSI only monitors nonresidential and multifamily projects, and does not consider any single-family home construction.

The recent trend in preconstruction project abandonment activity mirrors patterns observed a year ago, said Michael Guckes, ConstructConnect’s chief economist. In early 2024, abandonments ticked up in a delayed response to a rapid rise in interest rates, which began in 2022 and peaked around mid-2023.

“That was the fastest rise in interest rates that we had seen in almost all of recorded history because the Federal Reserve was doing that to help combat inflation,” Guckes said. “Higher interest rates raised mortgage expenses for those commercial real estate developers that were building structures using borrowed capital. That made it harder for those projects to pencil out, and they could only hold on to them for so long.”

Abandonment activity rose again in the first quarter of this year, but the dynamics are slightly different, he says. The elevated interest rate environment is still a “significant and persistent headwind,” and while rates have dipped a bit, many banks remain nervous about lending to commercial real estate developers and have capped their portfolios.

“If there’s no loan growth, then developers don’t have as easy access to the capital they once did,” Guckes said. “Additionally, projects continue to get more expensive, meaning that this cap on lending is actually resulting in fewer total structures being financed and built.”

Then there are issues with cost controls due to rising tariffs and an “incredibly volatile tariff environment,” he said. This makes it extremely difficult for owners and developers to have any sense of what it's really going to cost them to build a project over the next six months, or year, or beyond—a “big barrier” to new investment in infrastructure and CRE.

Another issue that has yet to take full effect is the shrinking construction labor force, Guckes said. This is going to put significant pressure on wages for the lower-tier jobs, and as those wages rise, all the tiers above them have to be compensated accordingly as well, to keep the tier structure logical, Guckes said.

“There are going to be real challenges this year with getting overall construction costs under control,” he said. “It will be essential to have space in your bids to make sure that you can cover volatile cost increases. Until we can wrap our arms around these critical issues, it is going to be very hard for owners and developers to know whether it makes sense to go forward with their projects.”