Mid-Year Construction Check: Cooling Inflation Boosts Most Sectors

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A new report looking at the U.S. construction market finds a mix of trends in the industry, from good to bad.

For example, inflation and interest rates have been a thorn in the side of contractors and project owners for the past two years. However, the latest consumer price index cooling inflation indicatedwhich has sparked optimism among forecasters who expect at least one interest rate cut before the end of the year.

But unless the Fed lowers interest rates, some segments of the housing market will struggle, especially those not supported by infrastructure or manufacturing spending, according to Marcum’s latest quarterly commercial construction index released last month.

That’s bad news for some sectors of commercial construction, such as warehouses and retail. Demand for warehouse space has stabilized after the pandemic-fueled e-commerce boom, while new retail construction continues to struggle with reduced demand, according to New York accounting and consulting firm Marcum.

On the other hand, the expenditure on production related projectsConstruction, spurred by federal incentives and efforts to move manufacturing overseas, has grown about 192% over the past three years, while infrastructure construction has also seen significant growth, said Anirban Basu, chief construction economist at Marcum and Associated Builders and Contractors.

Basic strategies

Despite a mix of challenges and opportunities, the construction industry as a whole has weathered about two years of high inflation and high interest rates much better than expected, Basu said. Prices for construction materials have fallen in May for the first time in 2024 and increased by just 2.1% year-on-year in May, he added.

Companies with innovative financing and cost management strategies are best positioned to navigate industry headwinds such as high interest rates, rising input prices and labor shortages, said Joe Natarelli, construction services leader at Marcum.

“Construction companies can explore innovative financing strategies, such as public-private partnerships, to leverage government funds and reduce financial risk,” Natarelli said. “In addition, seeking financing from alternative lenders, such as private equity firms, and creating investment funds targeted at specific projects can provide more flexible and customized financing solutions.”

Construction companies should also adopt advanced budgeting software to track spending in real time and manage costs predictively, Natarelli said. Long-term contracts with suppliers and lean construction practices also help minimize waste and improve operational efficiency, he added.

Natarelli added that construction companies operating in struggling sectors may also consider entering new markets.

“Companies should diversify into more stable markets, such as residential, infrastructure or institutional, where demand remains stable. Specializing in niche markets, such as healthcare or educational institutions, can also provide resilient opportunities,” Natarelli said. “Also, focus on renovation and retrofit projects, pursuing government contracts and capitalizing on the growing demand for sustainable, energy-efficient buildings.”