According to the latest Wells Fargo Economics report, total national construction outlays declined 0.2% during January. Residential spending ended a three-month streak of gains and fell 0.5% during the month. Although single-family spending continued to expand, multifamily and home improvement spending both dropped. Meanwhile, total nonresidential spending rose modestly as solid gains in infrastructure and data center spending offset weakness in manufacturing, commercial, and education projects. While relatively resilient economic growth and the lagged impulse from recent federal spending packages should continue as support factors, elevated interest rates, and increased economic policy uncertainty stand to constrain construction activity moving forward.
Residential Construction Weakens Despite Single-Family Upturn
- Residential construction spending fell 0.5% in January, driving overall construction outlays lower. Residential outlays softened for both public and private construction.
- Waning multifamily construction was the culprit behind the drop in private residential outlays. Private multifamily construction spending slipped 0.7% in January, marking the 14th consecutive monthly decline. This long slide has prompted a 12% year-over-year drop in multifamily outlays as of January.
- The pronounced pullback in multifamily construction has helped to improve the apartment market’s supply-demand imbalance, setting the stage for a modest uptick in apartment construction in 2025. The overall U.S. apartment vacancy rate climbed just 38 bps over 2024 compared to a 117 bps rise in 2023.
- Home improvement outlays also eased in January, slipping by 1.5% over the month. Despite the setback, the current pace of home improvement spending is still 14.3% higher than in January 2024.
- Private single-family construction spending bucked the trend with a 0.6% increase in January. January’s rise marked the fifth consecutive increase, reflecting the recent uptrend in single-family permits.
- Single-family construction spending will likely lose steam in the months ahead. Homebuilder confidence pulled back sharply in February, driven by deteriorating perceptions of buyer traffic and sales expectations. Even more, new home sales fell 10.5% in January amid frigid temperatures and still-elevated mortgage rates.
Infrastructure Construction Lifts Nonresidential Outlays
- Elevated interest rates appear to be suppressing nonresidential construction spending. Overall nonresidential outlays edged 0.1% higher, lifted by a burst of public infrastructure spending on highway and street and transportation projects. Private nonresidential outlays were flat amid weakness in commercial, manufacturing and educational projects.
- Aside from resilience in infrastructure investment, which is not typically interest rate sensitive, the lagged effects of monetary tightening appear to be denting both public and private nonresidential construction. The chart below shows that the year-over-year gains in nonresidential construction have broadly softened alongside the run-up in financing costs.
- January brought notable improvements in private health care, office and lodging construction. However, the pace of spending remains muted within each of these categories.
- The uptick in office construction was primarily owed to ongoing growth in data centers, which maintain momentum despite reports of several high-profile firms downsizing their leasing plans. Data center outlays rose 1.9% in January, capping off a 46.4% year-over-year surge.
- The AIA/Deltek Architectural Billings index (ABI) portends ongoing weakness in nonresidential construction this year. Although the ABI improved slightly to 45.6 in January, any reading under 50 reflects a deterioration in architecture firm billings activity. This index tends to lead nonresidential construction by about a year, underpinning our expectation for structures investment to slide in 2025.
