Commercial Construction Projects Keep Being Abandoned. Reviving Them Could Take Years

With demolition dust settled, permits in place and crews set to begin work, developer Shift Capital was finally ready to move forward on plans to construct hundreds of hotel rooms aimed at serving patient families and others from two nearby hospitals.

The project would have been the only hotel in that part of North Philadelphia to meet a growing market. But just as construction was gearing up and executives were preparing to sign loan paperwork, lenders pulled funding “at the eleventh hour,” according to principal Nancy Gephart.

The $70M project remains in limbo, the victim of spiking insurance rates and other costs that meant the project no longer penciled.

Shift is far from the only one putting projects on the shelf. This year, the pace of construction abandonments is on a sharp rise as the industry absorbs blows ranging from higher insurance rates, persistently high interest rates and skyrocketing materials costs or delayed shipping times to labor issues and bad weather. 

Putting the pieces back together and getting projects moving could take a year or more — if crews can be assembled quickly once conditions improve. And the bottom may still not have arrived, experts told Bisnow.

“I think we're just starting a period of moderating nonresidential structural spending as broader economic impacts start to really take their toll on spending momentum in the construction segment,” said Associated Builders and Contractors Chief Economist Anirban Basu, who also serves as economist and CEO of Sage Policy Group.

The “next 12 to 18 months may not look particularly good with respect to construction spending dynamism, though one suspects that we might see a quite formidable recovery in construction spending at some point thereafter,” Basu said. 

As of July, construction abandonments were up 11% nationally for both public and private projects compared to the same time last year and up almost 49% for private projects alone, according to the latest Project Stress Index analysis by software firm ConstructConnect. The index tracks preconstruction projects that experienced a delayed bid date, were placed on hold or have been abandoned in the last 30 days, and it has consistently charted an increase in development delays for months.

Alarm bells began ringing last year when a year-end member survey by the American Institute of Architects indicated nearly 30% of private and public construction projects had been significantly delayed, indefinitely stalled or abandoned altogether in the back half of 2023, up from 22% in December 2022 and 15% in September 2019, before the pandemic made an indelible mark on the economy.

Since then, projects large and small have been stuck in a holding pattern, from tech giant campuses to multifamily megaprojects. 

Apple announced in June that its $1B campus in North Carolina was on pause, and Rivian put its $5B electric vehicle plant near Atlanta on hold in March. Google halted its expansion of a 760K SF campus in Kirkland, Washington, in April, and the state suffered another blow a month earlier when pharmaceutical giant Pfizer walked away from the planned construction of a 270K SF biologics facility in Everett.

Abandonments have hit life sciences facilities, shopping centers, mixed-use centers, office complexes and multifamily projects.

Back in Philly, Alterra Property Group has scrapped plans for a 352-unit multifamily project in University City, with Managing Partner Lee Addimando explaining that a “combination of land cost, construction costs, interest rates, scarcity [of] debt capital for development, and rents don’t make for a viable project.” 

In Boston, a $9.6B, 10,000-unit apartment project pulled the brake in June. Now, just 475 of those units are set to open this year as owner HYM Investment Group reworks its financing.

“I think that the market is going to remain very weak in terms of construction activity for the next year or longer,” said Ken Simonson, Associated General Contractors of America chief economist.

Industry players cited several reasons they might pause a project. Common materials like concrete have skyrocketed in price and are delivering later and later. Production for electrical components like switchboards isn't keeping up with demand.

The delivery timeline was up to 48 weeks for most panelboards earlier this year, and it could take more than a year to source switchboards with stronger circuit breakers, according to Electrical Contractor Magazine.

In other cases, tenants are backing out of moves, and spring and summer weather has been uncooperative. Rising insurance costs are a new cause for delays, too.

In Philadelphia, that has been a factor in Shift's own paused project. The company has seen insurance costs leapfrog to between 25% and 50% higher than they were prepandemic, Gephart said. Some investors have said the insurance crisis risks paralyzing the industry.

“We just couldn’t bake this in,” Gephart said.

But experts told Bisnow an inhospitable capital markets environment is by far the biggest stumbling block to restarting halted projects. And while an expected September interest rate cut could be the jolt the industry needs to pick up the hammer and nail gun again, ConstructConnect Chief Economist Michael Guckes said that is more likely to help get new projects underway in the fourth quarter, not necessarily restart paused ones.

“My suspicion is that until financial market conditions improve in terms of lower interest rates and everything else declines [in cost], we're going to continue to see owners and developers struggle to make projects pencil out,” Guckes said.

Some of the problem is that demand for some once-hot projects is waning, making everyone involved in projects up and down the chain more skittish to pull the trigger. 

A supply imbalance in sectors like multifamily and office is encouraging developers to wait it out “to see more demand showing up in terms of people wanting to rent office space or apartments before they're going to start building more of them,” Simonson said.

That struggle echoes across asset classes.

“Rents have stalled or actually dropped for many markets, many geographic areas, for apartments or warehouse or office space,” Simonson said. “So I think that explains those kinds of postponements or cancellations.

“As far as abandonments on the manufacturing side, clearly Rivian and also some of the legacy manufacturers realized, ‘Hey, the public doesn't want nearly as many electric vehicles as we had expected,’ and would explain why those projects are being scaled back or canceled.” 

The same goes for the multifamily market, especially in the Sun Belt, where apartment construction boomed during the pandemic. New apartment construction declined 41% this year in the popular Miami-Dade area, and the number of projects being put on indefinite hiatus is rising, The Real Deal reported in May.

“The macroeconomics has created a lot of headwinds. A lot of projects are in a holding pattern,” Associated Builders and Contractors Florida East Coast Chapter Chief Operating Officer Sonny Maken told the publication. “People are worried about units being overbuilt. They are trying to get clarity on the demand.”

The asset class being hit hardest might be office, said Sandy Hamby, the CEO of MOCA Systems, a full-service firm. Most lenders have no interest in proceeding with such projects in struggling markets.

Those “developers may turn their attention to other investments like manufacturing, data centers, etc.,” Hamby said.

Even if interest rates fell tomorrow, it could be difficult to revive projects due to ongoing labor shortages, especially at the top. There aren't enough senior people in construction to plan timelines or adjust costs on the fly, Hamby said. And a lack of experienced people means that when projects do resume, project managers will all be fighting for the same people. 

“This glut will stay in place probably for 15 years due just to the lack of those that built really big projects in the past, [those who] knew what was coming up, knew what was going to impact their project, all being gone,” she said.

While more people have joined the construction industry, there were still 295,000 openings as of June, according to an ABC analysis of Bureau of Labor Statistics data. 

Those on the job are being paid a premium, Simonson said. The construction industry has always had to bake in high costs, but that is even truer today. Average hourly earnings for production and nonsupervisory employees in construction — covering most on-site craft workers as well as many office workers — climbed by 4.4% this year to $35.77 per hour by July, he said.

Those costs, too, are only rising. But the lack of senior workers could compound it and delay stalled projects longer, Basu said.

“In part due to a link in large-scale immigration, there's less of a shortage in entry-level construction,” Basu said. “But we do not have enough skilled electricians, pipefitters, carpenters [and] all the kinds of workers that are used in building commercial construction.” 

Some in the industry are hopeful easier capital will kick-start stalled projects sooner rather than later, especially if at least one other cost factor subsides. 

“I think after a certain point, something's got to give,” Gephart said. “So the optimist in me would like to think that, yeah, we will see some relief on one of these fronts next year.”

Until then, “like a lot of developers, we're constantly reassessing our pipeline and figuring out what makes sense to keep pushing, what makes sense to put on hold and what makes sense to potentially exit as well.”