Higher costs, fewer deals ahead for construction

The construction sector faces a tough ride ahead. Rising costs and a slowdown in deal activity are hitting contractors hard, squeezing their profit margins and reducing their backlogs, according to Anirban Basu, chief economist at Associated Builders and Contractors. While data center projects remain robust with about a year’s worth of backlog, other areas are not so lucky, with non-data center backlogs down to about eight months. High interest rates are a major concern as they make financing more expensive, further cooling the commercial construction market. This includes a dip in leasing for spaces like warehouses, largely impacted by tariffs and reduced import activity. The much-needed lifeline from federal and public funding is also expected to weaken as the Infrastructure Investment and Jobs Act funding runs out by September 2026, and state and municipal budgets tighten. This drying up of funds and the decrease in request for proposals (RFPs) for public works is troubling news for infrastructure contractors.

**Key Market Implications**:
- **Increased Pressure on Contractors**: Rising costs and slowing deals are likely to decrease profitability for contractors, particularly those not involved in data center projects.
- **Data Center Stability**: Data centers remain a strong area for construction, potentially maintaining momentum till at least 2027, driven by investments in AI infrastructure.
- **Financing Challenges**: High interest rates are curtailing new projects, especially in commercial sectors and markets saturated with new constructions.
- **Slowdown in Public Sector Projects**: As federal and public funding diminishes, infrastructure projects could see a downturn, affecting contractors reliant on these projects.
- **Potential Long-term Slowdown**: The overall slowdown might persist until late 2026 or 2027, pending improvements in borrowing costs and renewed federal spending.