July’s composite decline resulted from activity declines across all stress components. Chief among these was abandonment activity, which reported an unusually severe 24% monthly decline, followed by on-hold activity, which fell by 11%. Only the level of projects experiencing delayed bid dates, at a reading of 103.6, remains above its 2021 baseline.
The justification for such a rapid decline in today’s heightened rate environment is hard to identify. However, if general expectations are that the Federal Reserve will soon lower interest rates, this could explain the abrupt and steep decline in the number of stressed projects.
If owners and developers believe they need only wait a few more weeks—or just a few months at worst—for lower interest rates, then they would be correct in thinking that now is not the time to abandon or put projects on hold. Why abandon a project now if, in just a few weeks, falling commercial real estate mortgage rates will make that project financially viable? Indeed, it would seem that a brief “wait and see” approach makes the most sense.
| Delay Bid Date | On Hold | Abandoned |
|---|---|---|
(Month-on-month changes of less than 0.25% are indicated as unchanged)
Due to their distinct financing sources, public and private projects often exhibit different trends. Solid expectations for a near-term environment with falling interest rates would, in theory, disproportionately affect the private sector, which is much more sensitive and responsive to changes in the financial market outlook.
However, our sector data indicates that both sectors have greatly benefited from the factors driving the recent stress declines.
Our data indicate:
The Project Stress Index (PSI) composite represents an equal-weight measure of the seasonally adjusted level of preconstruction projects that have experienced a delayed bid date, been placed on hold, or abandoned in the last 30 days.
The PSI monitors only nonresidential and multifamily projects in their preconstruction phases, thus excluding single-family home construction. Each component has been seasonally adjusted and then indexed against its 2021 average weekly reading. The independent tracking of each status type gives unique insights into the timing, direction, and amplitude of market changes.
Additional information about the PSI, including detailed data about the individual readings for delayed, on hold, and abandoned projects can be found here.