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The Construction Economy Yearbook

2025 Construction Outlook

By Michael Guckes, Chief Economist, ConstructConnect

Check out the 2024 year-in-review

Look Back

Unpack Challenges and Uncover Opportunities in 2025

Swift and dramatic changes to US immigration and trade policies, stubborn inflation, and ongoing challenges in the construction labor market – these are only a few of the factors that make the path ahead for construction unclear in 2025. Chief Economist Michael Guckes unpacks these challenges and uncovers the opportunities that can propel your business through uncertain times.

Leading Drivers of Future Construction Activity

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ConstructConnect’s forecast for Total Construction Starts spending growth of 5.2% in 2025 is broad-based, with both Residential and Total Nonresidential Construction expected to expand by 5.7% and 3.6%, respectively. The new year’s anticipated rebound is thanks in part to two broad-based factors: a slowly improving interest rate environment and easing financial regulations.

ConstructConnect provides detailed Construction Starts forecasts for the U.S. and Canada every quarter.

 

An Improving Interest Rate Environment 

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The Federal Reserve reduced the Federal Funds Rate, an instrument that indirectly influences private sector borrowing rates, three times in 2024, landing at 4.25% to 4.50% by year’s end. Lower interest rates will function as a first and necessary step in reinvigorating nonresidential construction activity, allowing more nonresidential construction projects to pencil out. Additionally, easing interest rates will make housing more affordable, bolstering residential construction activity. Lower rates, and the ensuing improvement in housing affordability as a result, will significantly ease the current gridlock in sales caused by a combination of high home prices and high interest rates which have made homes historically unaffordable. 

For a quick view of local project trends in the U.S. and Canada, check out the ConstructConnect Expansion Index. The Index shows the dollar volume of construction projects in planning compared to a year ago.

 

Easing Financial Regulations 

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The second contributing factor to our positive outlook for 2025 will be the relaxing of financial regulations under a Republican-controlled government. This has the potential to bring commercial real estate (CRE) developers and financiers closer together after the banking sector began slowing new CRE loans in late 2022. From December of 2022 to December of 2024, CRE lending growth slowed from 12.8% to 1.1%. Although banks continue to maintain tight lending standards relative to pre-pandemic norms, the net percentage of banks tightening standards over the last year has fallen significantly. Expected further improvements in banking conditions should renew CRE lending growth thanks in part to the new presidential administration.

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The Construction Economy Yearbook 2024-2025
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2025: What’s in Store for US Construction?

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After a weak 2024, in which total US Nonresidential Construction Starts fell by 0.8%, this broad category—which includes Heavy Engineering and Nonresidential Building—is expected to move higher in 2025, with spending increasing by 5.0%, followed by 5.2%, and 2.9% in the years to follow.

2025_%_Change by SubCatg (VIZ) V2Click image to enlarge

Electrification Requires Power. A Lot of Power.   

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The electrification of the economy will continue to drive significant demand for power generation and power infrastructure projects. The growth of artificial intelligence, the increasing adoption of electric vehicles, and the growing reliance on electric appliances and devices will further stimulate the need for electric generation and infrastructure construction in the coming years.   

Work has already begun addressing the needs for electric generation, including billions being spent on wind and nuclear power projects and fusion energy research. We project spending in this area to hit a record $245 billion by 2028.

 

Private office spending, which includes construction for power-hungry data centers, increased by 7.4% in 2024. The year’s impressive growth in data center construction was significantly offset by weak starts in traditional office buildings. In 2025, we expect Private Office starts to accelerate to 16.3% as the drag from traditional office construction eases and data center-specific work continues to flourish. 

The response to the rising demand for electricity is evident in the number of recent power generation project starts with valuations exceeding $1 billion. Notable examples of recent energy megaprojects1 include a $10 billion wind-power farm off the coast of Virginia and a $4 billion next-generation nuclear power plant in Wyoming, among many others. ConstructConnect’s strong outlook for Miscellaneous Civil Construction, which includes power generation projects, reflects this trend. 

 

Manufacturing and Tariffs 

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ConstructConnect forecasts Manufacturing starts to rise by 13.4% YoY in 2025, followed by a plateau in spending between 2026 and 2028. However, our long-term forecast for manufacturing construction could be significantly influenced by changes in future trade laws and taxes. Tariffs on goods imported into the U.S. may encourage some companies to invest in manufacturing infrastructure domestically. If enough manufacturers choose this path, it could substantially enhance the growth trajectory of US manufacturing construction over our forecast period. However, those firms opting for this strategy face considerable risks. Specifically, they would need to establish and operationalize new manufacturing capacity while achieving their profitability goals and do so before tariffs are potentially lifted as soon as 2029. Otherwise, the addition of this new capacity, followed shortly thereafter by the removal of tariffs, could see the market swell with excessive product volumes, sending prices and profits lower.

Residential Construction

The outlook for Residential construction has substantially improved since the Federal Reserve began cutting the Federal Funds Rate in September of 2024. Additional rate cuts are expected in 2025, all of which are likely to send mortgage rates lower. This will create a cascading series of changes to the housing market and residential construction in particular. Falling mortgage rates will help to reinflate a market that saw residential construction contract by 9% in 2024. ConstructConnect forecasts 2025 and 2026 Single-family construction spending to grow by 3.4% and 10.9% respectively. Additionally, Multi-family construction spending is expected to rebound more quickly in 2025 at 10.8%, followed by even faster growth of 13.5% in 2026. 

2025 Look Ahead - Inventories of New and Existing Homes

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As housing construction transitions from recent years of contraction to future years of strong expansion, there are some pain points that firms will need to overcome. The first of these will be selling the existing glut of available new homes for sale. Measured in months of supply, the level of new homes available at the end of 2024 was 8.5 months, a level that falls on the higher end of historic norms. Simultaneously, the supply of existing homes at 3.3 months is near a record low, as homeowners continue to shun the idea of selling their homes only to finance a new home at a much higher interest rate and thus pay a much higher monthly mortgage payment. A lower rate environment, in contrast, could generate a surge of existing homes coming onto the market, which may initially dampen some new home construction demand. However, reigniting the present sluggish existing-homes market could subsequentially swell the ranks of existing homeowners who are now willing to upgrade from their existing homes by purchasing a newly constructed home. 

The Long-Term Outlook

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Individual category outlooks for the five years from 2025 through 2029 vary greatly among the nearly thirty categories that, in aggregate, represent Total Nonresidential spending. Cumulative 2025 through 2029 growth expectations range from over 50% for Military, Hotels, and Shopping to more than a 25% contraction for Government Offices and Prisons. Other sectors expected to grow significantly through 2029 include Warehouses, Offices and Data Centers, and Power Infrastructure.

Stay on top of the latest trends in delayed and abandoned projects with our exclusive Project Stress Index.

 

Construction Starts Spending

2025 Look Ahead - Heavy Engineering -1

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Heavy Engineering 

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Civil—or Heavy Engineering2—construction starts spending was the dominant growth leader in 2024, advancing by 12.1%. ConstructConnect anticipates 2024’s blistering growth rate to moderate to 7% in 2025 and 6.4% in 2026. Support from the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act (IIJA) of 2021 will continue to support Heavy Engineering work into 2025, with around $700 billion still to be allocated towards future projects. Additionally, ConstructConnect continues to monitor over $500 billion worth of megaprojects that have the potential to break ground during 2025. Among these projects, ConstructConnect is monitoring more than $49 billion in Transportation Terminals, $33 billion in Roads, and more than $4 billion in Dams and Canals work. Among the categories expected to benefit the most from Heavy Engineering demand in 2025 are Miscellaneous Civil works (+19.2%), followed by Roads (12.4%), and Dams, Canals, and Marine (11.8%). 

The increasing infrastructure needs of the country are expected to create a steady stream of civil construction projects in the coming years. Our forecast anticipates a compounded annual growth rate for civil work of nearly 4% for the segment through 2029. However, this growth hinges on the government's ability to access debt markets. If the government loses its capacity to obtain credit in the future, it poses a risk to our optimistic outlook for civil construction. Without easy access to debt, the government will face difficult funding decisions, having to prioritize spending on the military, education, and, lastly, infrastructure, all within a limited discretionary budget. 

Eyes on the Road Ahead

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A Republican-dominated Congress over the next two years will present opportunities, uncertainties, and specific risks to the construction community. Industry leaders who can find ways to benefit from the newly elected president and Congress’ agenda, while minimizing their exposure to the risks of that agenda, may find their next few years to be quite rewarding.   

Although details are lacking, a general plan to relax environmental and financial regulations, open more federal land to development, and lower business and personal taxes would all serve as tailwinds for the construction industry. Conversely, a stricter immigration policy is likely to worsen the industry’s current labor shortage. While some policies may have ambiguous outcomes – such as heightened tariffs – how these policies are executed may be the greatest determinant as to whether such policies produce a net benefit for the industry or not. 

Relaxed environmental and financial regulations, along with lower taxes, will benefit the industry and each could act as an impetus for accelerating construction activity. Easier access to financing and reduced tax burdens will ideally bring about a new wave of investment capital that supports new construction activity. This will be a much-welcomed turnaround after 2024’s weak nonresidential construction spending results. 

 

Trade and Tariff Reform

Trade and tariff reform will have mixed effects on construction’s future. Tariffs will raise the price of imports, which will strengthen the pricing power of building products manufacturers in the U.S. However, as tariffs increase the cost of construction materials, they may also sideline price-sensitive owners and developers. General and trade contractors will have to carefully monitor changes in their material costs and ensure their sales contracts allow them to quickly pass any higher costs onto their customers.

The breadth of construction products subject to tariffs is substantial. In 2023 more than 50% of all plastic, wood, and aluminum products imported to the U.S. came from either Canada, Mexico, or China. Additionally, over one-third of all copper, nickel, iron, steel, and cement imports also came from these countries.

Given the diversity of construction products that would be impacted by new tariffs, the construction industry needs to be prepared to face a broad wave of new pricing pressures that could result in significant construction cost inflation.

Immigration Legislation

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New immigration legislation will also create new uncertainty in the construction labor market. Policies that restrict the available quantity of construction labor will only worsen existing workforce size and productivity issues. A smaller and less skilled labor force will raise wages while eroding output per worker. This will put even greater emphasis on construction leaders to focus on the training and development of their employees.

For 2025: Be Encouraged and Plan Strategically 

ConstructConnect’s forecast should encourage industry leaders to carefully consider where to invest their marketing efforts in the coming years. Many segments of the construction sector are expected to thrive. However, the best way to maximize long-run growth is by developing a diversified revenue strategy that generates income from multiple market categories. Given the broad growth expected within the industry in 2025 and beyond, now could be the right time to begin diversifying your company’s revenue streams if you have not already.

Consequently, the largest obstacle facing leaders might not be that of finding revenue opportunities, but rather of finding enough suitable workers to take advantage of those future opportunities.

Thus, we believe the most successful firms of the future will be those that understand their workforce ambitions as a precondition to any revenue growth goals. A firm cannot grow its revenues beyond the bounds allowed by the successful attraction, training, and retaining of its workforce.  

 

1 ConstructConnect regularly refers to construction projects with values in excess of $1 billion as “megaprojects”.

2 ConstructConnect uses the terms “civil” and “heavy engineering” synonymously for the same construction category.

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2024 Year in Review

Michael Guckes, Chief Economist, ConstructConnect

While the US economy experienced a strong year of growth—with a rising GDP, low unemployment, and continued consumer spending—inflation and borrowing costs still cast a shadow. Construction starts also dipped, but there’s more to the story. Join us for a recap of how labor issues, costs, and other factors in 2024 have set the construction industry’s path for 2025.

Look Back

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Construction Economy Yearbook 2024-2025

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The Yearbook is designed to deliver actionable insights in a “year-in-review/year-ahead” format. Each year as bidding season begins, ConstructConnect will publish this report so that contractors, manufacturers, developers, distributors and investors can strategically plan for the year ahead.

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