Construction activity contracts amid soaring costs

New orders fell for third successive month in June and job growth stalled, according to BNP Paribas research

Activity in Ireland’s construction sector fell in June, the first contraction since April 2021 when the sector was constrained by public health restrictions.

BNP Paribas Real Estate’s June purchasing managers’ index (PMI) for the construction sector suggests that new orders fell “at a sharp and accelerated pace for the third consecutive month with “price pressures” leading to a drop-off in enquiries.

The overall index, based on a survey of purchasing managers in the sector, moved into contraction territory for first time since the spring of last year. However, the drop-off was more notable in commercial than residential construction where the decline was “only marginal”, the bank said.

With new orders declining, survey respondents said they had scaled back their own purchasing activity. Firms were also more cautious about hiring given weaker demand with some respondents noting that projects were put on hold due to cost pressures.

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Around 64 per cent of respondents signalled that their input prices had increased in June, the bank said.

“June has been a watershed month for construction activity,” said John McCartney, head of research at BNP Paribas Real Estate Ireland.

“The post-Covid rebound has been fading since February, but the June PMI reflects the first absolute pullback since pandemic restrictions were lifted.”

Mr McCartney said that “a recurring theme” is that construction costs are accelerating at a faster pace than the value of projects, “squeezing viability”.

However, he said the slowdown in the home-building sector was “marginal” and that roughly “28,000 new dwelling completions can be expected this year — a year-on-year rise of well over 30 per cent”.

Commercial activity, meanwhile, experienced a “sharper contraction”, reflecting cost pressures but also “a recognition that the existing pipeline of Dublin office development looks sufficient” to cover demand in the near-term.

Last week, a report by agent Cushman & Wakefield highlighted the dramatic recovery in Dublin’s commercial property market following the lifting of public health restrictions this year. According to the commercial property company’s figures, the net vacancy rate, particularly in Dublin’s Central Business District, has fallen from a multiyear high of 7.5 per cent at the end of June 2021 to 5.9 per cent last month and as low as 3 per cent in some sub-markets.

Prime office rents in the capital had also returned to pre-Covid levels by the end of the first half of 2022.

Ian Curran

Ian Curran

Ian Curran is a Business reporter with The Irish Times