Rider Levett Bucknall’s latest Forecast 112 report reveals a cautiously optimistic long-term outlook for New Zealand’s construction industry. While current demand remains subdued, cost pressures are easing and the infrastructure pipeline continues to strengthen, offering confidence for the sector’s recovery beyond 2025.
Slower-than-expected recovery in construction demand
RLB’s Forecast 112 noted that recovery in construction demand has been slower than expected. While there are signs of a pick-up in residential construction, non-residential construction contracted further. The pipeline of building work also remains soft.
RLB Director Grant Watkins said, “Construction cost inflation has continued to ease, reflecting spare capacity amid weak demand in the sector.”
“However, building sector firms report intensifying cost pressures but are finding it difficult to pass on higher costs by raising prices. Profitability in the construction sector remains weak as a result,” he said.
Flat activity masks regional and sector variation
Stats NZ’s Building Work Index showed that construction activity was flat in the March 2025 quarter. Although the volume of residential construction increased by 2.6 per cent, this was offset by a 3.9 per cent decline in non-residential construction. The result follows on from consecutive quarterly declines throughout 2024.
According to RLB, the weakness in construction activity was particularly pronounced in the North Island. Wellington faced a particularly sharp decline in construction activity in the March quarter.
Non-residential consent issuance for Auckland, Bay of Plenty and Otago has declined sharply over the past year, indicating a weak construction pipeline for these regions for the coming years.
Grant continued, “Heightened uncertainty about the global growth outlook and the potential negative implications for demand in New Zealand will likely slow the pace of the construction recovery over the coming years.”
“The weakness in residential construction demand was broad-based across the building types. Consent issuance for standalone houses picked up in recent months to once again be the most popular type of dwelling, but demand remains well below the highs seen in the mid-1990s,” he said.
Demand for higher-density housing, such as apartments, townhouses and flats, has fallen over the past year. Despite lower interest rates improving the financial feasibility of housing developments, the combination of lower net migration inflows and caution towards investment is weighing on demand for these types of buildings.
Non-residential consents decline across key regions
Non-residential consent issuance declined sharply for the year to April 2025, primarily due to significantly weaker demand for healthcare facilities. Non-residential construction demand remains weak across most sectors.
Across the regions, non-residential construction demand fell particularly sharply in Auckland, the Bay of Plenty and Otago.
Grant added, “The weakness in non-residential consent issuance in Auckland reflects substantial declines in construction demand across retail outlets, storage and industrial buildings, health facilities and accommodation buildings. These declines were partly offset by demand for office refurbishments in the Auckland CBD.”
“The decline in non-residential construction demand in the Bay of Plenty over the past year was broad-based across the sectors, with large declines in construction demand for healthcare facilities and office buildings,” he said.
Meanwhile, the reduction in non-residential consent issuance in Otago was also broad-based across the sectors, with declines in construction demand for health and education facilities as well as office and cultural buildings in the region.
In contrast, non-residential consent issuance grew in Manawatu-Wanganui over the past year. This was mainly driven by a slight increase in demand for the construction of storage and office buildings.
Labour market easing reduces cost pressure
Besides weak construction demand, the increased labour supply resulting from the reopening of international borders in 2022 has driven a turnaround in the availability of workers in the construction sector.
A net 11 per cent of building sector firms reported that it was easier to find skilled workers in the March quarter, while over a third reported an ease in finding unskilled workers.
This capacity in the construction labour market is reducing labour costs in the sector, which is supporting the easing of construction cost inflation. The 0.2 per cent increase in non-residential construction costs in the March quarter saw annual cost inflation ease to 1.8 per cent – the lowest growth rate since June 2013.
Cost inflation reaches lowest level in over a decade
According to RLB, non-residential construction cost inflation continued to ease in March 2025, with a 0.2 per cent increase over the quarter, bringing the annual inflation rate in non-residential construction costs to 1.8 per cent.
The decline in non-residential construction cost inflation to historically low levels reflects the presence of spare capacity in the sector.
Construction labour costs have fallen as firms find it easier to find both skilled and unskilled workers. Building sector firms also face weak pricing power given the soft demand environment.
RLB forecasts that non-residential construction cost inflation will remain low for the coming year, as continued weakness in construction demand in the near term weighs on the pricing power of building sector firms.
Grant concluded, “We forecast that annual non-residential construction cost inflation will ease to around 1.3 per cent in the second half of this year.”
“Beyond that, we expect a recovery in construction demand from 2026 will underpin a modest lift in non-residential construction cost inflation.”
Infrastructure pipeline points to long-term strength
Te Waihanga, the New Zealand Infrastructure Commission, reported in its Pipeline Snapshot for the March 2025 quarter that infrastructure projects totalled $206.9 billion in value, an increase of $2.9 billion from December 2024.
Of these, $111.6 billion has a confirmed funding source, an increase of $3.7 billion from the previous quarter. When it comes to projected infrastructure spending over the next few years, $16.6 billion is expected to be allocated in the 2025 calendar year, and $15.5 billion is planned for the 2026 calendar year.
$46.7 billion is estimated to be under construction, covering 2,043 initiatives, and $13.6 billion is in the procurement stage. Transport infrastructure remains the dominant part of the pipeline, with the value of these now totalling $132.4 billion. Annual spending on transport infrastructure is expected to stay above $4 billion each year over the next decade.
Transport infrastructure leads national investment
Transport is expected to account for 61 per cent of total infrastructure spending over the next decade. Water and energy infrastructure also continue to form key parts of the pipeline, totalling $31 billion and $10.9 billion, respectively.
The Infrastructure Priorities Programme (IPP) will assess unfunded proposals to evaluate their alignment with New Zealand’s strategic objectives, value for money and deliverability.
These long-term strategic objectives for New Zealand’s infrastructure encompass enabling a net-zero carbon emissions Aotearoa, regional economic development, the liveability of cities, resilience to shocks, and a circular economy. This assessment is an important part of developing the National Infrastructure Plan (NIP), identifying and prioritising infrastructure projects for the next 30 years.
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