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Uncertainty and higher interest rates are dragging down non-residential building

The surge in non-residential building activity during the pandemic is ending. One factor contributing to this is the withdrawal of stimulus measures, including government spending and ultra-low interest rates. In addition, demand for new buildings may be suppressed by pandemic-related changes, such as the shift to hybrid working, high rates of online shopping and lower rates of immigration. Higher interest rates will also drag on growth.

Leading indicators point to a drop-off across the sector

The value (in real terms) of non-residential building approvals has fallen over the last three quarters. FTI Consulting has also seen a reduction in the value of non-residential building projects entered into the Cordell major projects database over recent months.

This follows a mild downturn in values recorded over the last six months. The downturn has been more pronounced in activities most affected by COVID restrictions. Falls in the offices, accommodation, entertainment and recreation category reflect delays in returning to business as usual, and are at risk of becoming structural. A surge in federal and state government building projects, such as health-related projects, is also ending

Downturn likely to continue over two to three years

The value of work done across all non-residential building activities will fall by nearly 1.3 per cent to $46 billion in 2021–22. Activity is expected to shrink by a further 4.0 per cent next year.

The structural changes to key markets and industries will drive a softening in demand for new building activity for years to come.

Commercial building activity is expected to contract over the next two to three years, driven by a downsize in the business cycle in the offices sector, a continuing trend downwards in the retail and wholesale trade sector, and a deep drop in the accommodation sector. It’s likely the recent increases in interest rates will deepen the contraction in these sectors

Non-commercial building activity benefited from an increase in government spending during the pandemic, but this stimulus is being withdrawn. Education-related construction will slide down over the next few years as the sector adjusts to financial shocks caused by the absence and delayed return of overseas students.

Pressure points bearing down on non-residential builders Key areas of concern

Delayed population and immigration growth:

The business environment is changing quickly:

How FTI Consulting can help

Rising material and labour costs, a surge in the pipeline of building work, and disruptions in global supply chains present considerable challenges and opportunities including in:

The Economic & Financial Consulting team at FTI Consulting has deep experience providing advice on these issues and can help businesses navigate the challenges and the opportunities. For more information on these issues, please reach out to a member of our team. 

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