The Structural Shift—and Impact—of Changing Construction Trends

In a recent Marcus & Millichap video titled “The Structural Shift That Could Transform Real Estate,” Marcus & Millichap Senior Vice President John Chang predicted that commercial real estate construction could slump in 2025 and beyond. This outlook is diametrically opposed to the building mania involving industrial real estate and apartments over the past several years.

While Chang acknowledged that the possible downturn could be “just the real estate cycle in play,” he outlined the following headwinds likely contributing to the issue.

Baby Boomer Retirement

The pandemic helped thin the baby boomer workforce. More are retiring as they age. The issue is that “baby boomers have been the core of the construction industry for a long time,” Chang said.

He said about 5.4% of construction workers are older than 65 and could leave the workforce. Furthermore, “the pool of talent to backfill these most experienced workers has thinned,” Chang said. This means that experience is leaving the industry, and fewer younger workers are available to fill the gap.

Fewer Entering Construction

At the opposite end of the spectrum, Chang said the share of high school graduates going to college (versus the construction trades) hit 62% in recent years. In 1980, that share was 49%.

“Even though we’ve seen a recent boost in the number of young adults entering the construction trades it’s still well below what it was when the baby boom generation was coming of age. As a result, it will take time to develop the new talent,” Chang said.

Potential Immigration Downturn

Chang explained that the construction industry had bridged the worker gap by using foreign-born laborers—about 34% of those workers are foreign-born. However, the new presidential administration could put pressure on not just illegal immigration but also legal immigrants.

“During President (Donald) Trump’s first term, the number of legal immigrants to the U.S. fell by 46%,” Chang said. “Construction trades like plasterers, drywall installers, painters, roofers and carpet layers are particularly reliant on foreign-born labor.” If immigration to the U.S. falls, this could lead to a shortage of this skilled construction labor.

Capital and Materials Costs

An ongoing issue in the construction industry is that “construction loans are hard to get, and they’re relatively expensive, usually bearing interest rates north of 8%,” Chang said. Adding to the higher cost of capital is the higher cost of materials.

Construction firms have already seen price hikes on Canadian imported softwood lumber due to 2017 tariffs. A good portion of steel, copper, and cement are also imported. “If tariffs are implemented in President Trump’s second term, material costs could increase significantly,” Chang said.

Who Benefits?

While the above might mean longer timelines and more expense in development, Chang said that investors who own existing assets could have the advantage. While the above trends won’t happen overnight, “restricting new supply could be a strong positive that lifts occupancy rates, puts upward pressure on rents and bolsters property values,” he said.