Non-residential building construction capital expenditure

IBISWorld forecasts non-residential building construction capital expenditure to decline by 1.6% to $7.89 billion in 2024-25. Rising interest rates have played a significant role in reducing non-residential building construction investments. As the Reserve Bank of New Zealand has had high official cash rates (OCR) in recent years, the cost of borrowing has increased, making it more expensive for businesses to finance new developments. This can erode the profitability of projects, as higher borrowing costs outweigh potential returns. Consequently, some companies delay or cancel projects, adding to the decline. Also, economic uncertainty, exacerbated by global factors like supply chain disruptions, has made investors more cautious. This uncertainty causes companies to hesitate to commit to new construction investments until economic conditions stabilise.

Commercial projects have dominated non-residential building construction over the past five years. In December 2023, they represented 52% of the total value of planned non-residential construction, followed by industrial at 15% and education and health at 8%. The private sector remained the largest investor, contributing 48% of planned construction value, while the Central Government (Te Kawanatanga o Aotearoa) accounted for 16% and local governments contributed 15%.

The slowdown in the housing market also influences non-residential construction. With fewer residential developments, there is decreased demand for commercial and industrial spaces, like retail, office and warehouse facilities. Ancillary projects tied to housing development also face diminished demand. Meanwhile, rising construction costs, fuelled by higher material prices and labour shortages, further squeeze project profitability. These cost pressures make it harder for businesses to justify new investments, contributing to the overall decline in construction capital expenditure. However, many projects were recommenced over 2022-23, especially for office buildings and tourist infrastructure, which is expected to fuel an increase in investment in non-residential building construction. IBISWorld forecasts non-residential building construction capital expenditure to increase at a compound annual rate of 1.3% over the five years through 2024-25.