CONSTRUCTION MARKET OUTLOOK

Sector performance remains uneven, as tariffs present evolving challenges

The US construction market enters 2026 increasingly reliant on a narrow base of demand. Strip out data centers, power/utility, and federally funded infrastructure and the remaining non-residential market contracted through the second half of 2025.

The sectors still growing are capital-intensive and labor-intensive, which is concentrating cost pressure in specific trades and geographies rather than spreading it evenly. This explains why national escalation holds above 4 percent even as broader demand cools, and why regional variation has widened.

From a trade perspective, the takeaway from the recent tariff shift is that risk has not disappeared but has shifted. Contractors should expect continued volatility in material pricing through 2026 but with a lower ceiling on aggregate tariff exposure than existed before the ruling.

For owners and developers, the new tariff ruling offers a window to revisit paused projects. Lower effective tariff rates on a wide range of imported goods could improve feasibility on projects that were shelved in the second half of 2025. However, the 150-day clock on the Section 122 surcharge introduces a new planning variable: procurement decisions made before that deadline may lock in savings that could evaporate if Congress extends the authority.

Project pipeline continues to narrow

Source: Associated Builders and Contractors

Construction backlogs fell to eight months in January 2026, a four-year low, as commercial and heavy industrial pipelines thinned. Infrastructure stood out at 10 months, consistent with the broader spending picture where public investment is carrying volume while private activity pulls back. The contraction reflects cooling demand rather than distress, as contractors gravitate toward funded infrastructure work.

Data centers and infrastructure carry the market into 2026

Baseline view

Data center and infrastructure investment carried the market while traditional commercial and manufacturing sectors softened. Nonresidential spending rose to 57.6% of total construction by Q4, underscoring growing dependence on a narrow set of capital-intensive sectors. With GDP decelerating and the AIA/Deltek Architecture Billings Index extending its contraction to 43.8 in January 2026, near-term demand remains subdued.

Upside catalyst

Lower borrowing costs are beginning to filter into feasibility assessments; a trend that should only improve with the expectation of at least one additional rate cut in 2026. The Dodge Momentum Index rose 37% over 2025, with both commercial and institutional components up strongly. Data centers remain the dominant growth engine, with starts projected to rise 20-26% in 2026, while healthcare is forecast to climb 17% or more. Since planning-stage activity historically leads spending by 12 to 18 months, nonresidential acceleration is likely in late 2026 into 2027.

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