Construction Outlook

Navigating Supply-Side Dynamics Key Part
of Positioning Investment for the Future

• Demand represents only one side of the market, with long-term supply trends equally important to commercial real estate.
• The supply outlook should therefore be a central component in CRE investment strategy. 
• New construction typically lags market conditions, creating recurring cycles of excess capacity and supply shortages.
• As supply tightens, vacancies decline and rents rise, eventually encouraging development, which can reverse those trends
• Property types and individual markets move through distinct cycles, which structural shifts can also disrupt.
• Offices face a prolonged oversupply following the pandemic-driven shift in demand, while retail may be approaching a space shortage as it continues to adapt to e-commerce.\
• Apartments and industrial properties are absorbing excess supply nationally, but the construction outlook will affect even markets that are not currently oversupplied. 

• Three forces are aligning to restrain new construction and potentially delay the next development cycle by several years.
• Higher interest rates have significantly increased financing costs and reduced project feasibility.
• Trade policy, namely tariffs, and elevated shipping expenses are keeping building material prices high.
• Labor expenses are also under pressure from immigration policy and strong demand from AI and data center development.
• With overall costs elevated, new projects will likely remain limited until rents rise enough to support construction economics.
•  Slower building activity could extend the falling-vacancy, rising-rent phase of the cycle, giving investors a longer runway for rent growth than the historical norm. 

• Apartment units under construction are down 50 percent from their 2023 peak and continue to trend lower.
• Industrial space under construction has fallen 60 percent from its 2022 peak, with the pipeline continuing to contract.
• Self-storage construction investment is down 32 percent from its 2023 peak, while seniors housing and medical office are seeing similar declines.
• Retail and office construction remain subdued, with higher building costs likely delaying the next development cycle.
• Those demand drivers should be cross-indexed against shrinking supply pipelines and barriers to new construction.
• Policy, land availability and land cost, and infrastructure constraints such as water and power can further limit future supply and reveal opportunities that may otherwise be overlooked.