The US real estate construction industry is undergoing a structural shift that will have long-term implications for the CRE sector. The number of new apartment units coming online over the next few years is declining. Industrial construction is also slowing, and office and retail construction have been minimal for several years, said John Chang, national director of research and advisory services at Marcus & Millichap.
“We had record apartment completions in 2024 and industrial construction hit a record in 2023, so maybe the downturning construction is just the real estate cycle at play,” said Chang. “But I think the issue runs deeper, and I believe that construction of all types of commercial real estate will slump for several years, maybe five years or more.”
Chang outlined five factors that are weighing on the construction industry. The first is the wave of retiring Baby Boomers. Labor force participation of people over age 65 is trending lower, down to 20.2%, or a loss of nearly 400,000 workers.
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“Part of the problem this creates is that Baby Boomers have been the core of the construction industry for a long time,” said Chang. “About 5.4% of construction workers are over the age of 65 and at risk of leaving the labor force, and the pool of talent to backfill these most experienced workers has thinned. This brain drain will be a headwind for the entire construction industry.”
On the other end, fewer high school graduates are pursuing trades, with 62% of grads heading for college today compared with 49% in the 1980s. Although there has been 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. That results in additional time needed to develop new talent, which is the second challenge the construction industry faces.
The third factor is the potential for legal immigration to slow under the Trump administration. Under Trump’s first presidency, legal immigration fell by 46%.
About 34% of construction workers are foreign-born, noted Chang.
“Construction trades like plasterers, drywall installers, painters, roofers and carpet layers are particularly reliant on foreign born labor, but if immigration to the US falls, the shortage of skilled construction labor could worsen,” he said.
Beyond labor shortages and skills gaps, the fourth headwind is capital. Construction loans are difficult to get and they often bear interest rates exceeding 8% and compounding, said Chang.
Finally, the increasing cost of materials is an ongoing challenge that could grow under the Trump administration, said Chang. During his last presidency, lumber prices jumped dramatically due to tariffs on Canadian lumber. About 21% of steel used by the United States is imported as is 45% of copper and 24% of cement.
“If tariffs are implemented in President Trump's second term, construction material costs could increase significantly,” said Chang.
While the combination of labor shortages, skills gaps and financial and materials costs could restrain real estate development over the next several years, investors who own existing assets could benefit from increasing occupancy rates, upward pressure on rents and higher property values, he said.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
