Peace Accord Critical to Construction Recovery

Overview

A broad-based construction recovery will not materialize until interest rates ease. An easement in interest rates is contingent on a reduction in inflation. Last month I offered optimism that the peace accord with Iran could usher in lower inflation and hence lower interest rates. That qualified optimism was based on a durable peace and a gradual reopening of shipping traffic through the Strait of Hormuz.

The resumption of hostilities has pushed back a meaningful recovery in US construction activity. While politics and policy remain fluid in the middle-east, no resolution seems likely on the near-term horizon. Oil prices and uncertainty are expected to remain elevated. This puts upward pressure on rates via inflation premiums and risk spreads.

The inflation threat, arguably, has worsened. Not only has shipping through the Strait been curtailed, but the Houthi are now disrupting ship traffic through the Red Sea. Atop this, add on the new 50% U.S. tariff on Canadian goods, cement included, announced this week in retaliation for Canadian trade measures.

Remarkably, despite all the hindrances, economic growth remains resilient. While job creation and consumer spending are expected to soften in the months ahead -- they are still expected to expand. These are the two pillars of growth for the economy.

Taken together, the new set of cards on the table, suggests an outlook that reflects elevated interest rates, a gradual softening in economic activity, marginally weaker conditions for occupancy and leasing rates, and weak affordability conditions for new buyers. The near-term conditions look very similar to the conditions that dictated a decline in 2025 volumes. Unfortunately, these conditions are likely to endure longer than previously expected. A meaningful recovery that was expected to begin late this year could be pushed back as much as one year. The wildcard in the scenario remains the political conditions in the middle east and their resulting implications on inflation.

The upcoming Summer Forecast must make assumptions regarding the length and breadth of the disruptions in the Middle-East. The most likely options on the table is to are assume a point in the future in which a permanent resolution to hostilities and shipping disruptions end, or to assume there is no near-term fix to current conditions in the Middle-East that are impacting oil prices, inflation, and interest rates. The assumption chosen will play an important role in determining the timing and strength of the construction recovery. In either case, our Spring Forecast assumptions result in a more optimistic than current conditions warrant.