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The gulf between winners and losers in the construction industry is widening.
Projects valued at over a billion dollars have been consumed the thickness of the cash spent on non-residential construction this year. Many of these are massive data center projects, with builders and associated contractors tying up about one in six companies currently under contract to work on these builds. This is the highest ratio on record.
“Things have become more extreme,” said Anirban Basu, ABC’s chief economist. “The parts of the economy that were doing well before are doing even better now, and the parts of the economy that were challenged are now even more challenged.”
Basu spoke about the history of two construction industries during one October 7 Web seminar on economic forecasting of the construction executive. Here are three takeaways from the presentation.
Construction competition is heating up
Contractors today face more competition for available projects.
During a recent visit to Jackson, Mississippi, Basu said contractors told him they were seeing many more bidders on projects than in previous years. Jobs that once attracted two to four competing bids now draw as many as 12 to 16, he said.
The increase in competition, along with higher financing costscould push contractors to lower their bids to secure the work. The move would put further pressure on profit margins.
About 32% of attendees surveyed during the October webinar expect their profit margins to decrease over the next 12 months, compared to 26% in July. The share of contractors who expected margins to stay the same also fell from 42% to 34%.
“There is more concern about construction demand,” Basu said. “There is a higher proportion of companies that have seen their portfolios decline considerably.”
Webinar attendees noted weaker demand in parts of the non-residential construction market. About 21% identified insufficient demand for construction services as the main challenge, up 19% from July. Another 17% cited stricter project financing conditions, compared to 13% previously.
“If you are working data center projectsmaybe you don’t care as much because you can just pass on those costs, these hyperscalers that don’t seem that cost-sensitive,” Basu said. “But hotel developers, commercial developers, let’s say retail or warehouse developers, are really cost-sensitive.”
Little relief from construction costs
Contractors will have to prepare for another year high construction costsBasu said.
Materials prices have risen roughly 8% to 9% over the past year, while labor costs also rose 4% to 6% annually, according to the webinar.
Opening the Strait of Hormuz could ease pressure on oil prices and other construction inputs. However, Basu does not expect a substantial drop in material prices next year, even if the conflict with Iran ends.
“I think the Trump administration will double the tariffs in 2027,” Basu said. “It means that materials prices won’t get much relief because of course some of the higher tariffs fall on key construction materials: steel, copper.”
At the same time, Basu doesn’t foresee another massive increase next year, in part because shoppers can only absorb so much extra cost, he said.
“I don’t think material prices will drop dramatically in 2027 compared to where they are today,” Basu said. “But they won’t rise sharply either, because at some point people can no longer afford to buy those inputs.”
Growth by 2027
Don’t expect the U.S. economy to go into recession next year, Basu said.
Heavy spending on artificial intelligence infrastructures and energy projects should still boost economic activity in 2027. Federal deficit spending and business investment incentives could also help sustain growth, he added.
However, Basu warned that the economy is increasingly dependent on a handful of industries and wealthier households. The dynamic is leaving the activity vulnerable if tech companies decide to back out of AI-related projects.
A slowdown in investment would weaken corporate earnings and stock market performance, which in turn would weigh on consumer spending and economic strength, he said.
“It won’t take much for this to break loose,” Basu said. “All you need is a couple of hyperscalers to say, ‘we’re not going to spend as much on AI, we’re going to cut back.’
