Overall, 2024 was a period of considerable challenges for the construction industry since rebounding from COVID-19 in 2021. Year-over-year total construction growth, which started at 3.0% through the first quarter, ended the third quarter at a 5.4% contraction. Forecasts for the full year predicted a 2.4% decline in total construction, with decreases in both residential and nonresidential building construction more than offsetting the record spending growth seen in heavy engineering projects.

Fortunately, many of the factors resulting in 2024’s challenging conditions may soon give way as falling interest rates, lower tax rates and relaxed federal regulations, among other factors, work to bolster future construction spending.

Leading drivers of future construction activity

ConstructConnect’s 2025 forecast for total construction spending growth of 8.5% is broad-based, with residential and nonresidential building construction expected to expand by 12% and 8%, respectively. 

• An improving interest rate environment 

A portion of the new year’s anticipated rebound is thanks to two broad-based factors. The first is falling interest rates made possible by the Federal Reserve’s cutting of the Fed Funds Rate, an instrument that indirectly influences private sector borrowing rates. Lower interest rates will function as a first and necessary step in reinvigorating nonresidential construction activity and, more importantly, residential housing market 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.

• Easing financial regulations

The second factor 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 stopped expanding new CRE lending in late 2022 (see Figure 1). The annualized growth in CRE lending peaked at the end of 2022 at 12.8%. 

Since then, lending growth has tumbled, falling to 1.6% in the latest 12-month period for which data is available. When adjusted for inflation, CRE loan growth contracted in real terms during the second half of 2024. As a result, total CRE lending growth stalled during 2024, remaining stuck near $3 trillion. 

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 during the first half of our outlook period.

More drivers of the construction economy 

Other important construction drivers will specifically benefit the industry. In particular, the electrification of the economy will continue to drive significant demand for power generation and power infrastructure projects. 

Private office spending for 2024, which includes construction for power-hungry data centers, increased by 20% in the year-to-date period ending in September compared to the same period a year earlier. However, this figure masks the reality that the increase in data center construction has more than offset contracting spending on office buildings. 

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. The response to the rising demand for electricity is evident in the number of recent power generation project starts with valuations exceeding $1 billion, known as megaprojects. 

Notable examples 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.

2025 forecast highlights

After a lackluster 2024 in which starts were little changed from 2023, nonresidential construction spending is expected to increase in 2025 by 6.9%, followed by 5% and 4.3% in the following years. 

• Construction category outlook 

Individual category outlooks for the four years from 2025 through 2028 vary greatly among the nearly 30 categories that, in aggregate, represent total nonresidential spending. Cumulative four-year growth expectations range from 83% to as low as a 17% contraction. The average result is 25%, representing a compounded annual growth rate of nearly 6%, or more than double the expected rate of overall U.S. economic growth. 

Military construction leads among all category outlooks with cumulative forecasted construction growth totaling 83%, or 16.4% annually. This strong outlook includes a 56% rebound in 2025 after construction spending halved during 2024. 

Other sectors expected to grow significantly through 2028 include hotels and motels, with cumulative growth of 79% expected, followed by shopping and retail at 75%. Additionally, construction for nursing homes and assisted living facilities is anticipated to grow by a total of 55% through 2028, with an average annual growth rate above 11% (see Figure 2). 

 In the immediate future, conditions are expected to be well above average, with 80% of all categories expected to report positive year-on-year growth in 2025. Only six categories are expected to contract, with many rebounding in 2026 and beyond. Additionally, only four categories are expected to grow during 2025 at the same rate, or more slowly, than the overall U.S. economy, which the International Monetary Fund forecasts will grow at 2.2% (see Figure 3). 

• Civil and heavy engineering

Civil and heavy engineering construction starts spending was exceptional in 2024, with year-to-date growth through the third quarter at 21% and projected full-year 2024 growth of 18%. ConstructConnect anticipates 2024’s blistering growth rate to moderate to 5% this year and 6% in 2026. 

Support from the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act of 2021 will continue to support civil engineering work into 2025. As of late 2024, less than half of the legislation’s funds had been announced, leaving around $700 billion still to be allocated to future projects. 

Additionally, ConstructConnect continues to monitor more than $500 billion worth of megaprojects with the potential to break ground during 2025. Among these projects are 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 grow the fastest thanks to strong from civil engineering demand in 2025 are bridges (11.3%), followed by dams, canals and marine (10.8%) and roads (10.7%).

The increasing infrastructure needs of the country are expected to create a steady stream of civil engineering projects in the coming years, contributing to a projected compounded annual growth rate of more than 5% for the segment through 2028. However, this growth hinges on the government’s ability to access debt markets. If the government loses its capacity to obtain cheap credit in the future, it would pose a risk to our optimistic outlook. 

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.

• The manufacturing outlook

Manufacturing spending experienced a significant decline of 45% in the year-to-date period through the third quarter of 2024. Full-year expectations are for a total decline of 48%. However, this downturn is not necessarily indicative of weakness in the sector; rather, it reflects a return to more sustainable spending levels. 

For context, manufacturing construction spending surged to more than $100 billion annually in 2022 and 2023, compared to an average of only $37 billion annually during the previous five years. ConstructConnect’s forecast for 2024 anticipates spending of $55 billion, which still represents a notable increase when viewed against the historical trends. 

Looking ahead, our forecast is for 19% growth in 2025, followed by generally stagnant conditions between 2026 and 2028. 

However, ConstructConnect’s long-term forecast for manufacturing construction could be significantly influenced by recently proposed tariff initiatives. Tariffs on goods imported into the United States may encourage some companies to invest in manufacturing infrastructure domestically. If enough manufacturers choose this path, it could substantially enhance the growth trajectory of U.S. manufacturing construction over our forecasted period. 

Yet 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, all 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 especially profits lower.

• Residential construction

The outlook for residential construction has substantially improved since the Federal Reserve began cutting the Federal Funds Rate in September 2024. 

Additional rate cuts are expected in 2025 and 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 14% in 2023 and is projected to see another 7% contraction by year-end 2024. 

ConstructConnect forecasts 2025 and 2026 single-family construction spending to grow by 13.1% and 12.4%, respectively. Similarly, multifamily construction spending is expected to rebound more slowly in 2025 at 9.5% and then increase more dramatically in 2026 with growth of 17%.

As housing construction transitions from recent years of contraction to future years of strong expansion, some firms will need to overcome pain points. The first will be selling the existing glut of available new homes for sale. Measured in months of supply, the level of new homes available was last recorded at 7.3 months, a level that falls on the higher end of historic norms. 

Simultaneously, the supply of existing homes at 4.3 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 in 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 (see Figure 4).

Implications of the 2024 election 

A Republican-majority Congress over the next four 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 this agenda may find their next four years quite rewarding.

• Environmental and financial regulations

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 to the construction industry. Conversely, a stricter immigration policy will likely worsen construction’s current labor shortage. 

Finally, some policies may have ambiguous outcomes, such as heightened tariffs. How these policies are executed may be the greatest determinant as to whether these policies produce a net benefit for the industry.

Relaxed environmental and financial regulations, along with lower taxes, will benefit the industry; each could act as an impetus for accelerating construction activity. Easier access to bank capital 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 and strengthen the pricing power of U.S. building products manufacturers. However, as tariffs increase the cost of construction materials, it may also sideline price-sensitive owners and developers. General and trades contractors will have to carefully monitor changes in their material costs and ensure their sales contracts allow them to quickly pass any higher costs on to 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 United States came from either Canada, Mexico or China. Additionally, more than one-third of all copper, nickel, iron, steel, cement and similar product 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

New immigration legislation will also create new uncertainty in the construction labor market. Policies restricting 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 further eroding output-per-worker. This will put even greater emphasis on construction leaders owning the in-house training and development of their employees (see Figure 5).

2025 Outlook: Encouraging, but plan strategically

Overall, 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 this year and beyond, now could be the right time to begin diversifying your company’s revenue streams if you have not already. 

Finally, construction growth cannot happen without a sufficiently large and well-trained labor force. Unfortunately, the retirement of the baby boom generation and the reduction of immigrant labor will only aggravate the country’s existing labor challenges. Consequently, the biggest future hurdle facing leaders might not be finding revenue opportunities, but rather 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 aggressive revenue growth goals. A firm cannot grow its revenues beyond the bounds allowed by the successful attraction, training and retaining of its workforce.

Michael Guckes, chief economist at ConstructConnect, has more than 20 years of experience in economics, including eight years in civil construction and six years in manufacturing. Guckes joined ConstructConnect’s economics team in 2022, shifting his focus to the nonresidential and civil construction markets.