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United States / Analyst Insights
Key Construction Drivers (Part 1): Commercial Slowdown

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by Marisa Lifschutz, Lead Industry Analyst
Jan 14 2019

Following many consecutive years of accelerated building activity and double-digit annualized growth, commercial building construction is anticipated to decelerate in 2019 due to slowed growth in key demand drivers. Though rising consumer spending and an expanding number of businesses are expected to continue to support positive industry growth, the pipeline of new commercial projects is anticipated to slow as mounting financing and material costs inhibit builders and developers. Meanwhile, trends favoring a more efficient use of office space, including the recent proliferation of shared coworking spaces, will slow demand growth from the industry’s major markets as office rental vacancy rates rise. Overall, IBISWorld expects revenue for the Commercial Building Construction industry (IBISWorld report 23622a) to expand 4.0% in 2019, bringing total industry revenue to $236.6 billion.

During the first 10 months of 2018 (latest data available), total private commercial construction spending amounted to $73.0 billion, representing a 3.2% increase, compared with the same period in 2017. However, growth has decelerated in more recent months, with total private commercial construction spending between August and October 2018 contracting slightly compared with the same August-to-October period in 2017. One factor contributing to this trend is the rising cost of material inputs for nonresidential projects; the Bureau of Labor Statistics (BLS) reports that the Producer Price Index (PPI) for new office building construction, which tracks price changes for new office construction as well as maintenance and repair construction, rose to 139.6 points in November 2018 (latest data available), representing a 5.6% increase in the index since November 2017, reaching a record-high level.

Additionally, rising interest rates, as evidenced by an expected 9.2% jump in the yield on a 10-year Treasury note in 2019, have raised the costs of financing new projects for developers. Overall, the accelerating prices of construction materials, labor and financing are expected to slow growth in the development of new commercial projects in 2019 relative to recent years as builders struggle to generate positive margins. Additionally, after soaring to new heights in 2018, corporate profit, a major driver of commercial building construction, is expected to top out in 2019 following a 3.0% jump, before declining in subsequent years, representing a dwindling number of potential corporate expansion projects.

Decelerating growth for the Commercial Building Construction industry is expected to impact numerous downstream industries. Overall, the industries that will be most affected by slowing private spending on commercial construction projects include those that are upstream from the Commercial Building Construction industry, primarily those that provide inputs or labor to the industry’s general contractors. These include wholesaling industries such as the Stone, Concrete and Clay Wholesaling industry (42332), which provides the raw materials necessary for commercial construction. Slowing demand from general contractors will result in fewer sources of revenue for industry wholesalers, as contractors will require fewer material inputs. Additional wholesaling industries that will be significantly affected include the Construction and Mining Equipment Wholesaling industry (42381), as general contractors will require less capital equipment (i.e. cranes and hydraulic pumps) for a shrinking supply of new projects.

Furthermore, upstream specialty trade contractors, such as operators in the Concrete Contractors (23811), Electricians (23821), Carpenters (23835) and Plumbers (23822b) industries, will also be heavily affected by slowing commercial construction demand. These industries provide specialist services that are often undertaken during the final phases of nonresidential building construction, and a slowing stream of new projects will result in reduced demand for contractor services. However, many of these operators provide diversified maintenance and repair services to the residential building market and other nonresidential building markets, which will help to keep demand afloat moving forward.


Edited By: Sean Egan