The Fed’s change in stance and the expectation of lower rates over the next year certainly set the stage for that. The Dodge Momentum Index, which tracks nonresidential building projects from the initial planning stages, has been steady over the last six months, indicating that developers and owners feel confident that conditions will improve over the next year. Even as lower rates percolate through the economy, expectations should be tempered as construction activity will continue to be restrained by tight labor conditions, strict credit standards and high materials prices.
In 2024, total construction starts have risen 8% to $1.2 trillion: Nonbuilding starts have increased 11%, while residential starts jumped 8%, and nonresidential building climbed 6%. The lower rate environment in the new year will allow some of those projects in planning to move forward to starts, with total construction rising 9% in 2025 to $1.3 trillion. Residential starts will accelerate, rising 12%; growth in nonbuilding starts will ease back to 9%; and nonresidential building starts will remain steady at 6% growth— albeit with a very different mix in contributions by sector relative to 2024.
This forecast, though, is not without risk. Geopolitical concerns remain worrisome. Should tensions in the Middle East escalate further or engulf more combatants, a potential run-up in oil prices could have significant negative impacts on the U.S. economy.
SECTOR BY SECTOR
Single-family starts were a solid performer in 2024, rising 15% in unit terms. This growth was especially robust in zip codes that are outside of major metro areas as hybrid and remote-work options continue to give workers flexibility in finding more affordable housing. That momentum, though, will not be repeatable in 2025 as starts slow to 5% growth. Restrictive zoning laws, labor restraints and materials prices will skew the market towards the higher end and crowd out younger and less affluent potential buyers. The massive shortfall in housing, though, has created an opening for multifamily housing. Planning reports have been steadily increasing since November, portending a trough in starts in early 2025. After falling 10% in 2024, multifamily units will rebound and increase 11% in 2025.
Commercial construction starts rose 5% in 2024, but the pattern of growth was mixed. Retail starts were solid in response to stronger single-family construction; the beginning of an upgrade cycle pushed hotel starts higher; and data center construction was exceptionally robust. On the flip side, warehouse construction fell and traditional office starts were very weak. The script will somewhat change in 2025, allowing commercial starts to accelerate to 7% growth. Retail, hotel and data centers will continue to drive activity, but warehouse starts will be essentially flat as Amazon restarts their building plans and has added new construction projects to the planning cycle. Traditional office starts will continue to fall.
Manufacturing starts fell 19% in 2024 but remain well above historical norms. Reshoring activity remains solid, but a larger number of EV and EV battery plants have either been delayed or canceled outright leading to a pullback in starts. Several semiconductor and petrochemical starts are slated for the new year, which will push manufacturing starts up 9%.
Institutional building starts grew 16% in 2024, pushed ahead by several large projects in the healthcare, transportation and recreation categories. Starts will settle back in 2025, growing at a more sustainable pace of 4%. Healthcare starts will continue to be a main contributor as hospital construction overtakes clinic and nursing home activity. Education starts will also climb due mainly to K-12 starts as new residential developments get built.
Nonbuilding starts strode further ahead in 2024, increasing 11%: Public-works starts rose 16%, while electric power activity fell 2%. Infrastructure funds continue to flow into the market, but the trajectory of that growth faces a key test over the coming quarters. Congress is currently operating under a continuing resolution through December 20th, which maintains funding at FY2024 levels. Assuming Congress passes the needed appropriation bills in December, which seem like a Herculean task given the current situation in Washington, it’s likely that public works starts will be essentially flat over the next three to six months before starting to show signs of growth.
Even as that acceleration happens in the later portion of 2025, IIJA funds will likely be less impactful over time as much of the money has already been filtered down to state and local areas. Public-works starts will slow in 2025, rising 11%. On the utility front, a stable outlook for utility-scale wind and solar as well as grid hardening will push starts 1% higher in the new year. In total, nonbuilding starts will increase 9%.
