Construction market faces good, bad and unknown prospects

Between tariff wars, shifting federal legislation, speculation about interest rates, changing GDP projections, postponed projects, depressed architectural billings and ongoing strong points within the economy, the outlook for the construction industry can feel convoluted.

“Are we looking at growth or contraction in the future? What we’re witnessing and hearing from our network is about a 50-50 split between good and bad news,” said Russ Robertson, Managing Partner, Cap Ex Advisory Group.

On the bright side, the data center construction market continues to experience robust growth.

Institutional construction — higher education projects, healthcare facilities, government buildings, public infrastructure and other ventures funded by the federal CHIPS and infrastructure bills — have also continued at a healthy pace.

On the gloomier side, many for-profit developments in the multi-family, mixed-use, retail, office, industrial and other sectors have been deterred by sustained high interest rates and heightened lending requirements as institutions decided to lower their risk in commercial real estate ventures.

Meanwhile, uncertainty over the potential impacts of tariffs and speculation about an economic slowdown have further weighed down private developers’ calculations.

“A lot of developers who are focused on private financing, have been really struggling to make deals work, so we have seen a lot of construction deals just sit on the bench and wait for a different market,” said Ben Nichols, President and CEO of Harkins Builders.

“I definitely saw softness in the market late last year and early this year,” said Ted Bowes, President of Excell Concrete Construction and BC&E President. “Larger dollar projects haven’t been moving forward like they were in recent years.”

Those difficult market conditions mingled in with the resolution of some tariff disputes, passage of taxation laws and executive orders designed to facilitate construction are prompting market watchers to issue mixed construction projections for the near future.

“I think everyone should be cautiously optimistic but also prepare for a potential slowdown in projects,” said Matt Verderamo, Group Director at Well Built Construction Consulting.

The AIA/Deltek Architectural Billings Index has shown declining billings for almost all of the last 34 months. The one bright spot in the index is inquiries about new projects rose slightly in May and June.

“Frankly, I have been scratching my head for the last couple of months because the Architectural Bills Index seems to indicate there is going to be a major slowdown,” Verderamo said. “But there hasn’t been one. RFPs are still coming through the pipeline and there is still a relatively strong backlog for many contractors.”

While market watchers search for more clarity, construction industry experts say contractors should focus on business fundamentals.

“You always want to seek product diversity so that you can flex into whatever type of construction that’s in demand in order to keep your volumes strong,” Nichols said.

Harkins, he explained, has developed a healthy, sustainable business pipeline by developing expertise in affordable housing (a sector that remains relatively constant through economic cycles) and in institutional construction.

“We are able to work for the Department of Defense and for groups like the Johns Hopkins Applied Physics Laboratory and other large institutions that tend to weather all kinds of economic conditions,” Nichols said.

Harkins, he added, has further strengthened its pipeline by expanding into other geographic regions, including central Virginia and the Hampton Roads area, which are both currently experiencing strong construction volumes.

To weather shifting market conditions, contractors need to constantly build strong relationships with general contractors and clients and strive to become a preferred service provider, Bowes said. Subcontractors also need to be strategic in their bidding practices.

Rather than scrambling to bid on a large number of projects, “we look at the work that’s going out to bid and evaluate our chances of winning the project, getting good margins, landing work that fits what we do and for customers that are really good to work for,” he said.

Bowes and others are optimistic that more bidding opportunities are on the horizon.

“I’m actually very positive on where the economy is going,” said Bowes, who has seen an uptick in bidding opportunities recently. “If you take into account reduced margins by contractors which has occurred over the past year, and the likelihood that interest rates will go down, I feel developers and business owners will want to build something and move forward with construction in the next six to 12 months.”

The current market actually presents some favorable conditions for institutional and nonprofit construction projects, Robertson said.

“A higher interest rate environment doesn’t hurt institutions and nonprofits as much because they don’t use as much debt to finance their construction projects,” he said.

Due to legislation recently passed by Congress, “construction theoretically just got a little easier because of tax savings and depreciation advantages that would arguably make the development of institution-led or mission-driven capital projects easier, especially in disinvested neighborhoods,” Robertson said.

“In limited instances, tax-exempt institutions and nonprofits might also be able to mitigate tariffs on certain building elements by doing direct purchases from suppliers and contain their construction costs,” he added.

“I think people are more optimistic about the construction market,” Nichols said. “You’re starting to see some trade deals get done so there is a little less volatility in the market. I think banks are loosening their standards a bit, so I feel activity is going to break loose towards the tail end of this year and into 2026.”