Softness in construction spending predicted for 2025 & 2026

After increasing by almost 20% in 2023 and another 6% last year, construction spending for nonresidential buildings—commercial, industrial, and institutional facilities—is projected to slow dramatically this year and next. Panelists participating in The American Institute of Architects’ Consensus Construction Forecast are expecting gains of only 2.2% this year and 2.6% in 2026. Of these sectors, spending on institutional facilities is projected to see the strongest gains of 6.0% this year and 3.4% next year. Commercial construction spending is expected to increase by only 1.7% this year before climbing to 4.2% in 2026 while spending on the industrial sector should grow 2.6% this year before contracting by an almost equal amount of 2.5% next year.

The modest outlook for construction spending is partly based on a few expected headwinds to building activity, including potential tariffs on imports from selected countries, as well as the enforcement of stricter immigration policy. The threat of increased tariffs is a major source of concern regarding reigniting inflation. The threatened 25% tariffs on goods imported from Canada and Mexico and an additional 10% tariffs on goods imported from China would be inflationary to the overall economy since they are our three largest trading partners. Also, these tariffs could limit the availability of several materials and products used in construction. Among other products, the industry imports lumber and construction equipment from Canada, cement and gypsum from Mexico, and furniture, plastics, and electronics from China.

However, perhaps the biggest policy concern for the construction industry is how emerging immigration policy might impact the construction labor force. There are approximately 12 million construction workers nationally, of which about three million are foreign-born. It is estimated that half of these immigrants are undocumented, so it is likely that about one in eight construction workers nationally is undocumented. The concern is not only the potential deportation of undocumented workers but also the chilling effect on potential new immigrants who might otherwise fill construction positions in the coming years.

The U.S. Census Bureau announced the following value put in place construction statistics for December 2024:

Source: U.S. Census Bureau, February 3, 2025

Total Construction

Construction spending during December 2024 was estimated at a seasonally adjusted annual rate of $2,192.2 billion, 0.5 percent (± 0.8 percent)* above the revised November estimate of $2,180.3 billion. The December figure is 4.3 percent (±1.3 percent) above the December 2023 estimate of $2,101.3 billion.

The value of construction in 2024 was $2,154.4 billion, 6.5 percent (±1.0 percent) above the $2,023.7 billion spent in 2023.

Private Construction

Spending on private construction was at a seasonally adjusted annual rate of $1,688.5 billion, 0.9 percent (±0.5 percent) above the revised November estimate of $1,674.1 billion. Residential construction was at a seasonally adjusted annual rate of $939.5 billion in December, 1.5 percent (±1.3 percent) above the revised November estimate of $925.5 billion. Nonresidential construction was at a seasonally adjusted annual rate of $749.0 billion in December, 0.1 percent (±0.5 percent)* above the revised November estimate of $748.6 billion.

The value of private construction in 2024 was $1,661.7 billion, 5.6 percent (±1.2 percent) above the $1,573.0 billion spent in 2023. Residential construction in 2024 was $917.9 billion, 5.9 percent (±2.1 percent) above the 2023 figure of $866.9 billion and nonresidential construction was $743.8 billion, 5.3 percent (±1.2 percent) above the $706.1 billion in 2023.

DODGE

The Dodge Momentum Index (DMI), issued by Dodge Construction Network, grew 5.6% in January to 225.7 (2000=100) from the revised December reading of 213.6. Over the month, commercial planning increased 4.2% while institutional planning improved 8.7%.

“Nonresidential planning activity saw diversified growth in January, with every vertical experiencing positive momentum,” stated Sarah Martin, associate director of forecasting at Dodge Construction Network. “Uncertainty over fiscal policies, ongoing labor shortages and elevated construction costs will continue to be headwinds to the construction sector. However, further monetary easing and the sizable number of projects in planning should support construction spending in the back half of the year.”

On the commercial side, data center, traditional office building, and warehouse planning led this month’s gains. Education and healthcare planning supported the institutional portion, especially on the hospital side. In January, the DMI was up 26% when compared to year-ago levels. The commercial segment was up 37% from January 2024, while the institutional segment was up 9% over the same period. The influence of data centers on the DMI this year remains substantial. If we remove all data center projects between 2023 and 2025, commercial planning would be up 13% from year-ago levels, and the entire DMI would be up 11%.

A total of 33 projects valued at $100 million or more entered planning throughout January. The largest commercial projects included the $500 million Amazon Data Center in Jeffersonville, Ohio, and Phase 1 of the Hunter’s Ridge Data Center in Mclean, Virginia. The largest institutional projects to enter planning were the $407 million Memorial Hospital expansion in Colorado Springs, Colorado and the $300 million AdventHealth Hospital expansion in Parker, Colorado.

The DMI is a monthly measure of the value of nonresidential building projects going into planning, shown to lead construction spending for nonresidential buildings by a full year.