2025 Forecast: Rate Cuts Expected to Boost Construction

As interest rates finally begin to ease, economists are fairly optimistic about how the overall construction market will fare in the coming year. For example, following the total 75 basis point cut so far this year, an additional 25 basis point cut is expected in December, totaling 100 basis points cut in 2024, with another 100 basis point cut predicted for 2025, says Richard Branch, chief economist at Dodge Construction Network.

The Dodge forecast estimates an 8% increase in the dollar volume of starts by the end of 2024, with an additional 8.6% predicted for 2025. Residential work is predicted to end the year up 7.8%, with another 11.5% increase next year. While multifamily starts are down this year, Dodge predicts a rebound in 2025 as vacancy rates have risen over the past year. “This is still a fairly robust market,” Branch says.

Non-residential starts are up 5.7%, and expected to rise an additional 5.9% next year, spurred by hotels, retail and health care. Non-building construction starts rose 11.2%, and are forecast to increase another 8.8% next year as federal funds continue to boost highway and bridge construction.

Dodge Construction Starts Forecast: 2025 ($ Bil)

FMI Construction Put-In-Place Forecast: 2025 ($ Bil)

While things are trending in the right direction, “rates, even now, are still higher than they’ve been over the past couple of years,” Branch says. “It’s probably going to take about 125, maybe even 150 basis points of cuts before we start seeing a more consistent growth in the economy and more consistent growth in the construction market.” Branch predicts the economy will begin to see that movement at the midpoint of next year.

“We know that construction activity, for the most part, has been moving fairly sideways over the last [six months],” he says. Rate cuts at that level are “what’s really going to get the gears kind of turning here.”

Looking Forward

“The U.S. economy continues to do really well, 3% growth year-over-year, [which] based on historical standards, is a fantastic place for us,” says Michael Guckes, chief economist at ConstructConnect. Despite this, ConstructConnect reports that total construction spending is down 0.2% year-over-year in 2024.

“Due in large part to financial reasons, we aren’t seeing parallel growth in construction,” he says, pointing, as Branch did, to high interest rates. Still, there are many sectors doing “tremendously well, [but] the relatively smaller dollar size of these segments aren’t enough to push up the total nonresidential result.”

For next year, ConstructConnect expects spending to rebound, with residential up 12% and non-residential increasing 8%. Total construction spending is predicted to rise 8.5%.

“I have never seen a segment grow like [manufacturing] has.”

-Jay Bowman, FMI Consulting, Partner

Jay Bowman, partner at FMI, says he feels “fairly positive” about the market for next year. “I know there’s a lot of negative talk out there [regarding inflation and labor shortages], but I think the industry is doing pretty good, all things considered.” The FMI construction put-in-place forecast expects an overall 5.4% increase in construction spending for 2024 and an additional 2% gain in 2025.

However, Bowman’s optimism comes with a caveat. “This idea that there’s this one U.S. construction industry is misleading,” he says, adding that FMI tracks 19 different segments that are “moving in different directions.” The FMI forecast points to single-family housing and transportation being among the strongest markets.

Bowman adds, “Single-family homes might be the most surprising to me, given the trifecta of inflation, mortgage rates and consumer sentiment,” the latter of which he notes is still below pre-pandemic levels. FMI forecasts single-family construction put-in-place will end the year up by 5.2%, with a 4.5% rise expected next year.

Spending in transportation construction is predicted to increase 5.3% in 2024, and 4.2% in 2025. “Transportation construction continues to be strong,” says Bowman, pointing to “really major projects” at Los Angeles International Airport, LaGuardia Airport and John F. Kennedy International Airport. “IIJA is obviously helping with that,” he adds.

Multifamily put-in-place is on the downswing, expected to fall 4% this year with another 15.9% drop in 2025, according to FMI. Bowman attributes this to a “capacity” issue. “I don’t think that this represents a shift in people not wanting to live in multifamily,” he says, but rather a correction to overbuilding during the past few years.

In addition to multifamily, Bowman points to hotels and offices as “lagging in terms of growth prospects over the next five years.” Still, he adds: “Just because a market is down does not mean it’s dead. I haven’t seen a market go to zero yet.”

One market moving in the positive direction is health care, says Bowman. FMI estimates put-in-place spending in this sector to increase spending 1.3% in 2024 and 2.6% in 2025. The rise of medical office buildings in addition to hospitals accounts for much of this growth, with hospital construction now only 40% of overall construction.

Manufacturing “obviously has been the darling of the construction for the last couple of years,” says Bowman. “If you look at the growth between 2022 and 2023, I have never seen a segment grow like it has.” Spending is expected to increase 21.1% in 2024, with another 5.3% boost in 2025.

Further Ahead

“Further tax cuts aimed at small businesses could be a sizeable
benefit to contractors.”
-Richard Branch, Dodge Construction Network, Chief Economist

While the current Dodge forecast does not account for election results, “the election of Donald Trump and the Republican majority in Congress could have a profound impact on the economy and the construction sector in 2025,” says Branch. “Further tax cuts aimed at small businesses could be a sizeable benefit to contractors and service providers and allow them to invest more in workers and equipment. Additionally, a reduction in red tape and looser regulatory policies may allow for construction projects to move more quickly through the planning stages to start.”

“Several states increased their own revenues to match federal funds and make additional transportation investments.”
-Alison Black, ARTBA, Senior Vice President & Chief Economist

Branch also points to energy policy as a positive for the construction industry. “The rapid increase in data centers and high-tech manufacturing projects may be limited by existing electrical generation capacity,” he says. “The new administration’s ‘all-in’ energy policy could promote further buildout in natural gas-fired plants and nuclear facilities to meet this added demand and allow for further buildout in data centers and manufacturing.”

As for concerns, labor is at the top of the list, as the industry is already “woefully short” of workers. “Roughly one-third of the construction labor force is foreign-born, and a crackdown could result in meaningful delays in moving projects forward,” Branch says.

Tariffs could also pose an issue, as they have the potential to raise costs. Regardless, says Branch, it’s unlikely these policies could affect the economy in the first half of 2025. “Legislative and executive actions take time to ripple through the economy, meaning that any impact on the sector will likely be felt in the second half of the year.”