Small Rise in Residential Not Enough to Offset Drop in Nonresidential
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Construction Remains Under Pressure from Higher Borrowing Costs
High interest rates continue make their mark on construction activity. Total construction spending declined 0.1% in April, the second straight monthly drop. The pullback largely was the result of a retreat in nonresidential outlays, notably within the commercial and healthcare categories. Meanwhile, gains in single-family and home improvement project spending were enough to offset another drop in multifamily spending, resulting in a small improvement in overall residential outlays. Although several segments have managed to side-step the effects of restrictive monetary policy, the downshift in nonresidential and multifamily spending indicates that increased financing costs and reduced credit access remain as a significant headwind for the construction industry.
Residential Outlays Holding Up
- Total construction spending dipped 0.1% in April as higher interest rates weighed on nonresidential investment. Residential construction outlays continue to rise, eking out a 0.1% improvement over the month.
- Single-family building remains the primary driver of residential spending. Single-family construction spending improved modestly over the month (+0.1%) and has surged 20% over the past year. Accounting for an upward revision to March data, single-family outlays have now increased for 12 consecutive months.
- Builders have been successful using price and rate incentives to lure buyers in the high-interest rate environment, leading to a trend improvement in single-family building this year. Conditions remain less favorable for multifamily construction amid rising apartment vacancies and tighter access to financing.
- Private multifamily outlays slipped 0.3% in April, the sixth downturn over the last eight months. Although apartment demand is sturdy, multifamily outlays will likely stay weak for some time as new apartment supply continues to outpace demand.
- Home improvement spending turned up slightly in April but remains depressed by high financing costs, hovering 13.4% below the peak reached in May 2022.