New year, same challenges

It might be a while before the construction industry gets some relief from the challenges it faced in 2025.

Inflation, uncertain trade policies and high interest rates are projected to carry over at least into the early part of 2026, according to the Washington-based Associated Builders and Contractors (ABC). However, there is optimism that economic conditions could improve.

“There’s some reason to suspect it’ll be a tough year,” ABC Economist Zack Fritz says. “The theme of 2025 has certainly been uncertainty. I think we’ll see that continue with trade policy, some labor force dynamics and borrowing costs in 2026. We’re cautiously optimistic that, by the end of the year, we’ll have some more policy certainty. Borrowing costs are coming down. Lending standards are a little bit looser, and, hopefully, we’ll see a pickup in construction starts by the end of 2026.”

Federal clarity needed

High interest rates pose the biggest obstacle to facilitating more spending on projects, Fritz says.

The industry received some good news from the Federal Reserve to end 2025 as it cut interest rates by 0.25 percent to a range of 3.5-3.75 percent in December of last year. While this marks the third cut in recent months, the rates still might not be low enough.

“We need lower borrowing costs,” Fritz says. “It’s not clear that rate cuts are going to deliver that given what’s happening in bond markets. I do think we’ll eventually get there, but borrowing costs are too high, and lending standards are too high right now, so that’s our primary headwind.”

Another reason contractors are hesitant to start new projects is the escalation in materials prices. According to ABC’s latest analysis through September 2025, costs increased 3.5 percent for the 12-month period.

Some of the increase has to do with the uncertainty surrounding the Trump administration’s trade policy. ABC adds that it’s unclear how higher tariffs on key materials like iron, steel, aluminum and copper will affect prices going into 2026 but notes that those materials all have exhibited year-over-year price increases.

“Trade policy and uncertainty [are] right up there,” Fritz says. “That’s really weighing on project work. If you don’t know how much your materials are going to cost, and these things can change quickly, that can really reduce construction volumes.”

Fritz says one item not receiving as much attention as it probably should is the pending expiration of the 2021 Infrastructure Investment and Jobs Act in 2026. How Congress elects to approach infrastructure remains to be seen, but the government has until Sept. 30, 2026, to reauthorize or replace the act. The timing of the expiration is not ideal as members of Congress prepare for midterms.

Data center boom

According to an ABC report, the construction backlog came in at 8.4 months through October 2025, which was on par with 2024.

But the caveat, according to Fritz, is that data center activity is propping up the healthy backlog. About 1 in 7 contractors surveyed by ABC are under contract to work on data centers and have a significantly longer backlog at 10.9 months than those who aren’t.

“The sectors that are doing well are data centers, and the ones that aren’t are pretty much everything else,” Fritz says. “Now, that’s not entirely true. There are a few other small segments that have done all right. But a lot of sectors are being affected by the same cyclical factors. Borrowing costs are really high. There’s a lot of uncertainty, and a lot of project owners don’t want to go forward under those conditions.”

Fritz adds that some of the other solid sectors are food service construction, which includes restaurants and bars; residential renovation work; and religious construction.

Much in the same way artificial intelligence (AI) companies have propped up the stock market, data center construction has helped the construction industry navigate an unpredictable 2025. Fritz says the massive data needs required to run AI are forcing tremendous amounts of investment into these data centers.

He says another factor driving data center expansion is the automotive industry’s gradual push to self-driving cars, which will require data and a high level of connectivity.

Project pullbacks

Spending on manufacturing and warehousing projects decreased in 2025, which has affected the construction industry. Fritz says in the aftermath of the COVID-19 pandemic, warehouse construction increased to satisfy the growing prevalence of e-commerce, but that’s starting to wind down.

He adds that warehouse spending remains somewhat elevated compared with prior to the 2020 lockdown.

“There’s really not a ton of momentum out there outside of data centers right now,” Fritz says. “I think it’ll be a better year for home building—I wouldn’t call it a good year for home building. Residential construction is eventually going to pick up. There’s a big structural shortage of homes, but I don’t necessarily think that’s going to happen in 2026 and certainly not the first part of the year.

“I don’t think there’s a ton of positives necessarily carrying over to the early parts of 2026.”

Large technology companies also have capital on hand to invest, and Fritz says with trade uncertainty and high interest rates making traditional means of investment unattractive, much of that capital is being used to construct data centers.

Job openings decline

Through October 2025, the construction industry reported 213,000 job openings, according to the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey. ABC says industry job openings decreased by 18,000 in October compared with the previous month and are down by 36,000 compared with October 2024.

Fritz says it’s hard to know how the Trump administration’s immigration policy is affecting the availability of construction workers.

“At the industry level, job opening data can be very volatile from month to month,” he says. “All of which is to say the thing about undocumented workers is they’re not documented, and it’s very difficult to know how they are or are not factored into the data. And we should have a better idea at some point in 2026, but we’re just not there yet.”

Data availability has been affected by the government shutdown, which occurred from Oct. 1 through Nov. 12, 2025. However, the temporary funding bill that ended the shutdown only lasts through January, which means another shutdown could be on the horizon if Congress doesn’t pass the necessary measures in time.

“Construction spending is falling, which is lowering the demand for construction workers,” Fritz says. “At the same time, to some degree, we’re not sure how much we’ve seen a reduction in the supply of construction workers. Usually, if spending falls, your workforce will be somewhat stable, and you’ll see rising unemployment. We haven’t necessarily seen that because the supply of construction workers is falling at the same time as demand for construction is declining.”

The author is the managing editor of Construction & Demolition Recycling and can be contacted via email at chsweeney@gie.net.