New construction starts continue to decline in the face of rising interest rates and higher material costs—though strong economic conditions and increased infrastructure spending could mitigate declines in the near future, according to the latest Dodge Data & Analytics report.
Construction starts last month fell 5 percent from August to a seasonally adjusted annual rate of $709.6 billion, producing a reading of 150 for the Dodge Index after August’s 157 reading, Dodge reported.
After reaching the current year’s high in June, momentum has now receded for the third consecutive month. Starts were down 9 percent in both July and August.
“The pace of construction starts has clearly slowed over the past three months, following what was unsustainably high levels during May and June,” said Robert A. Murray, Dodge’s chief economist.
Nonresidential building fell 6 percent and nonbuilding construction fell 13 percent, due mainly to sharp declines in electric utility and gas plant construction starts, though public works held basically steady.
Indeed, the electric utility/gas plant category nosedived 76 percent following its 43 percent jump in August, according to Dodge. September starts were considerably smaller in scale than in previous months and included a $146 million power transmission line in the Las Vegas area; an $89 million solar power farm in Springfield, S.C.; and a $50 million solar power installation in Ludlow, Vt.
Residential building was the one major sector to see a year-to-date increase, rising 6 percent with single-family housing up 7 percent and multifamily housing up 5 percent.
Through the first nine months of 2018, total construction starts on an unadjusted basis were $599.9 billion, down 1 percent from the same period a year ago—due mainly to a 49-percent drop for the electric utility/gas plant category. Excluding that, total construction starts during the first nine months of 2018 would be up 1 percent compared to the same period last year.
While the pace of construction starts has slowed, it’s still too early to proclaim an official downturn in the industry, Murray says.
“There are of course mounting headwinds affecting construction, namely rising interest rates and higher material costs,” he said. “But for now these have been balanced by stronger economic growth, some easing of bank lending standards, still healthy market fundamentals for commercial real estate, and greater state financing for school construction and enhanced federal funding for public works.”
Elsewhere, the National Association of Realtors reported existing-home sales declined in September after a month of stagnation to a seasonally adjusted rate of 5.15 million, due to rising interest rates depressing sales. Separately, IHS Markit reported construction costs in September rose for the 23rd straight month—with the biggest price gain in electrical equipment. The trend for increases across the industry is projected to continue.
Together, all of these reports suggest potential turbulence ahead.