Construction activity in the United States and Canada is likely to remain steady at the start of 2024 as projects underway keep worksites busy. What's less clear is how the year might end.

In a new outlook for the industry released Tuesday, real estate services giant JLL said developers face a "complex operating environment" where the demand for housing and other property types is high, but financing can be difficult to find. On the whole, JLL said prospects generally look positive, "But long-term industry health depends on the relative pace between the current pipeline emptying and private starts resuming."

Construction has largely sputtered since the pandemic disrupted supply lines and central banks began hiking interest rates to battle skyrocketing inflation. The likelihood that interest rates stay higher for longer, keeping debt costs high, threatens to continue to delay many plans for construction early next year, JLL said. But that pressure should be offset by new public spending on infrastructure and manufacturing initiatives.

Overall, spending should grow modestly next year, moderating from the days when supply and labor disruptions led to price spikes and inflation soared. JLL said its projection is based on a delicate balancing act: While the lack of private construction activity should help check rising costs, new government spending on infrastructure and a tight labor market could keep prices from falling.

"Numerous threats remain which could push prices back into highly volatile movements, generating uncertainty in 2024," JLL said. "Increasingly frequent natural disasters, trade conflicts and geopolitical tensions may disrupt U.S. supply chains, the likelihood of which will be exacerbated by it being an election year."

To be sure, there's plenty of appetite for space, what with high demand for housing, new government initiatives and the changing needs of workers who are gradually returning to the office. JLL forecasts overall construction spending in the U.S. to remain mostly unchanged in 2024, ranging between $1.45 trillion and $1.5 trillion next year — roughly the same level budgets are at during the final quarter of 2023.

“Margins will feel some pressure as contractors shore up backlogs against fewer starts and address labor retention and productivity issues. Limited labor availability will set a price floor for construction for the foreseeable future, keeping total costs in growth territory,” according to the JLL report. “Materials will continue to be a mixed bag, with broad stability in commodity items contrasting against continued shortages in electrical and other finished goods, as well as the potential for global shocks.”

Like the U.S., high interest rates are helping to delay new developments across Canada despite the country seeing record levels of construction activity in 2022.

JLL analysts said they don’t expect the Bank of Canada to reduce rates until the middle of 2024 at the earliest, which means construction activity would likely remain muted during the next few months, perhaps longer.

“The prime lending rate — which lenders use to price construction loans — should remain near cyclical highs for several months. Construction activity will likely continue to slow for the next few quarters as developers delay groundbreakings,” JLL analysts said in their report on future development in Canada. “However, if inflation continues to slow and debt markets stabilize, this will give builders more confidence and could lead to a rebound in launches beginning in the spring of 2024. The federal government is also signaling its intent to facilitate development in the face of rapid population growth and the country’s housing supply crunch.”

The slowdown in construction, however, appears to be having a positive effect on inflation and supply chain pressures.

“The overall inflation rate has slowed from a peak of 8.1% in June 2022 to 3.8% as of September 2023, with construction inflation falling in tandem. Year-over-year construction cost growth has slowed significantly in both the residential and non-residential sectors,” according to the JLL report.

Of course, construction activity can vary by market.

Take Austin, Texas. Office construction there remains robust despite many tenants putting their space up for sublease, said analysts at Cushman & Wakefield.

“There is currently 6.2 million square feet of office space under construction citywide," Cushman & Wakefield said in a report. "Approximately 2.6 million square feet of this space lies within the [central business district], including Waterline — the soon-to-be tallest building in Texas that will add 700,000 [square feet] of high-end office space upon its completion in 2026. At close of [the second quarter] 2023, approximately 23% of the office product under construction citywide was pre-leased.” 

Some 17 projects totaling 5.54 million square feet were completed in downtown Austin in 2022, and another five projects came on line through the third quarter of this year, according to the Downtown Austin Alliance. Those five 2023 projects resulted in 1.3 million square feet of hotel, office and residential space completed.

Another 33 projects in downtown Austin are scheduled to move forward in 2024 or shortly thereafter, the alliance said. Those projects include the 787,000-square-foot Perennial, Stonelake Capital Partners’ 550,627-square-foot office and residential development at 415 Colorado and Turnbridge Equities’ citizenM Hotel.

Paying attention to local market dynamics "is more crucial than ever," JLL said. "Rapid changes in environmental regulations, material costs and shifting customer preferences necessitate proactive market analysis at a 30,000-foot view, while demographic shifts and emerging regional industry trends necessitate local knowledge. Success requires knowing what’s coming next and how to best anticipate the macro and micro impacts on people and projects."