Moving into 2025, I have my eye on stagnant and declining property valuations in certain segments, the most notable of which is the office category. It’s no secret that the pandemic and the rise of remote work fundamentally altered the demand for office space. While construction spending in the office category, as tracked by the U.S. Census Bureau, is down just 2% compared to February 2020 (the month before the pandemic began to affect the economy), that understates the dearth of investment for one simple reason: The office category includes data centers.
General office construction is down 27% since the start of the pandemic and has now fallen to levels not seen since the beginning of 2018. Of course, that’s in nominal terms. Accounting for inflation, construction spending on office buildings has fallen to the lowest level since the first quarter of 2015.
TAKING UP RESIDENCE
The multifamily residential segment faces a similar, albeit less severe and structural, issue. The past few years have seen a historic boom in apartment construction, as the combination of low borrowing costs in 2020 and 2021 and widespread housing shortages induced significant investment. As a result, there were more multifamily housing units completed in August 2024 than in any month since April 1974, over half a century ago.
This massive increase in unit supply has resulted in falling rents in certain high-demand areas. That, in conjunction with the highest interest rates in 15 years, has led to a sharp decline in authorizations for new multifamily units. Permitting for multifamily units has fallen more than 40% since hitting a nearly four-decade high in early 2023.
This has already resulted in a sharp decline in multifamily construction activity, with spending in the segment down 10% since hitting an all-time high in mid-2023. Given that the number of multifamily units under construction continues to plummet, multifamily investment will continue to slow in the coming quarters.
ON THE REBOUND
While the current malaise in both of these segments is worth losing sleep over, I think multifamily construction will rebound more quickly than office construction. For apartment projects, many of the problems are cyclical. Interest rates are elevated, despite the Federal Reserve initiating a 25-basis-point rate cut at its September meeting, and lending standards remain restrictive. While the recent onslaught of supply in certain markets has lowered rents, the nation still faces a severe and structural housing shortage. Over time, that will bolster multifamily construction.
The headwinds facing the office segment are more structural in nature. While the share of employees working either remotely or on a hybrid schedule has increased at a slower rate recently, and may even start to decline if the labor market loosens, it won’t return to pre-pandemic levels. More than one in four workers was either hybrid or remote in 2023, up from one in 10 in 2019. This trend, and the uncertainty surrounding it, will keep office construction volumes suppressed for some time.
FREE WEBINAR: Anirban Basu will present “Construction Executive’s 2024 Construction Economic Update and Forecast” on Dec. 11. Register for this program and watch previous forecast webinars at webinars.constructionexec.com.
