October’s month-on-month PSI increase resulted from higher bid-date-delayed activity (up 9.0%), which was almost entirely offset by decreasing on-hold activity (down 4.9%) and falling abandonment activity (down 2.6%).
Compared to total activity from the same month one year ago, the composite is down 11.6%, marking the fourth consecutive month in which year-on-year results have contracted. This year has been very good for the PSI, with year-to-date composite performance down 14.6%. If conditions continue at this level for the rest of the year, the PSI will arguably have its best year since 2021.
The Federal Reserve signaled earlier this year that it would begin decreasing the Federal Funds Rate (FFR) around the end of the third quarter. This had a preemptive and significant impact on the PSI, causing abandonments and on-hold projects to decline to multi-year lows. This decline occurred just before the Fed’s mid-September cut of 0.5%.
A lower Federal Funds Rate places downward pressure on private sector loan rates, including commercial real estate (CRE) loans. As private sector rates fall, CRE owners and developers benefit from lower mortgage payments and, by extension, improved operating performance.
Such financial benefits make clear why owners and developers may have held back from delaying, stalling, and especially abandoning projects in recent months when it was nearly assured that some form of financial relief was imminent.
With September’s rate cut in the books, the PSI has seen a modest increase in stress levels as readings for delayed bid dates, in particular, have bounced from recent record lows.
In contrast, current measures of abandonment activity are tracking on the lower side of historic norms. Performing even better is on-hold activity, which has spent the last four months and counting at historic lows. Expectations of future rate cuts should continue to lower future stress readings and set the construction industry on a rebound trajectory as soon as 2025.
| Delay Bid Date | On Hold | Abandoned |
|---|---|---|
(Month-on-month changes of less than 0.25% are indicated as unchanged)
Sector Status Update
Due to their disparate financing sources, public and private projects often exhibit distinct stress trends. However, actual and anticipated falling interest rates benefit projects across both sectors.
The level of delayed bid date and on-hold projects in both sectors is currently between long-run levels, if not slightly below long-run levels.
The current level of abandonment activity across both sectors is well below that of a year ago.
In the private sector, in particular, abandonment activity has performed favorably. Year-to-date abandonment activity has been trending lower, with a particularly sharp decline occurring just before the Fed’s rate cut.
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 nonresidential and multifamily projects in their preconstruction phases only and thus excludes any 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.