The 2025 Forecast: Top Takeaways

Editor’s Note: The following is based on forecast presentations from Dodge Construction Network’s 2025 Annual Outlook, ConstructConnect’s Fall 2024 Economic Outlook, the American Institute of Architects’ Consensus Construction Forecast, Deloitte’s 2025 Engineering & Construction Industry Outlook, and Connor Lokar’s annual economic forecast keynote from GlassBuild America 2024. 

Last year presented several significant challenges for the construction industry, particularly in the commercial sector. The industry faces persistent difficulties in attracting and retaining talent, ongoing supply chain disruptions fueled by geopolitical tensions and global economic uncertainties, higher interest rates, economic uncertainty, inflationary pressures, and shifting regulatory hurdles in response to natural disasters and evolving building codes and environmental regulations. 

Despite these significant hurdles, construction spending crossed $2 trillion and maintained a balanced trajectory in the first half of 2024, according to a Deloitte analysis of data from the U.S. Census Bureau. And the Dodge Momentum Index, a measure of nonresidential building spending, has been on a steady rise in the second quarter of 2024, reflecting growing confidence in market conditions among owners and developers. 

Macroeconomic perspectives and projections 

U.S. economy holding its own 

“The reasons I feel most positive about 2025 really comes down to the fact that the Federal Reserve has started to cut rates,” says Richard Branch, chief economist, Dodge Data & Analytics. “We had the 50 basis point cut from the Fed in September. We had another 25 basis points last week [in November]. We think the Fed will go again in December. That’s a full 100 basis points of cuts this year. And we think there’s another 100 basis point cut through the course of 2025. By the end of 2025, the Fed’s funds rate will be at around 3%.” 

“We’re projecting inflation will be back at 3% to 5% as we move through the rest of the 2020s,” says Connor Lokar, senior forecaster, ITR Economics. “You need to make a plan in your business with how you’re going to deal with higher inflation and interest rates.” 

Lower rates to support growth in 2025 

With the three major categories—residential, non-residential and infrastructure—in totality, Dodge forecasts total construction starts will rise 9% in 2025, to $1.3 trillion. 

“The thing we really need to look at is how are lower rates impacting the economy,” says Branch. “We need to process that there’s not going to be a massive uptick in construction or economic activity. It’s going to take probably about 125, maybe even 150 basis points, in cuts before we start seeing a more consistent growth in the economy the construction market.” 

Dollar value of projects stabilizing 

Branch’s optimism on the construction sector is tied into the Dodge Momentum Index, which tracks nonresidential building projects under $500 billion as they enter the earliest stages of planning. Planning took a step backwards in 2023 over unfounded fears that the economy would go into recession, and developers began slow-walking projects through the planning cycle. The recession didn’t materialize, and throughout 2024, the DMI remained reasonably stable, despite a mix of high rates, labor and materials challenges. 

“The one big takeaway I have is that this has remained stable for so long,” says Branch. “It tells me that developers and owners feel reasonably positive that the conditions for construction will improve in the future, and they want to have projects sitting in the pipeline ready to go for when those conditions improve.” 

The state of the transition 

“How is the election going to impact the forecast? Quite frankly, the truth of the matter is we just don’t know,” says Branch. “It’s a mix of positive and negative for the construction sector.” On the positive side, tax cuts could help the bottom line of construction tradespeople across the country. On the negative side, aggressive legislation on undocumented workers could possibly derail any growth potential in construction and manufacturing. 

Ken Simonson, chief economist, Associated General Contractors of America, predicts that lessened federal regulations anticipated under the incoming Trump administration could help some projects start sooner. At the same time, tariffs that President-elect Donald Trump has said he will institute have the potential to cause “a huge spike in prices” and could likely trigger a trade war, says Simonson. “We’d see a lot of projects canceled or at least scaled back.” 

A Trump presidency, with a potential Republican-led Congress, should positively impact the overall construction economy, according to Michael Guckes, chief economist, ConstructConnect, who agrees that a relaxed regulatory environment will promote construction activity, along with lower taxes and the opening of federal lands to development. “These changes could free the construction industry of the regulations that have historically held it back from faster growth,” Guckes says. 

“It’s unclear how much legislation is going to move in 2025 now,” adds Simonson. “President-elect Trump can impose tariffs without waiting for Congress, but some of the more drastic steps would require Congressional approval.” 

Geopolitical conflicts and trade tensions 

Several geopolitical conflicts and tensions could impact the construction industry in 2025. From Middle East tensions impacting oil prices and transportation, agitation between the U.S. and China over trade policies that could disrupt supply chains and increase construction material costs, escalating trade tensions between the U.S. and the European Union, and the ongoing Ukraine-Russia and Israel-Hamas conflicts, many factors loom that could influence construction project timelines, budgets and availability of resources. 

• The 200% tariff imposed by the U.S in March 2023 on aluminum and derivative products from Russia is still in effect. 

• The Trump administration is calling for continued tariffs on Chinese products, between 60% and 100%. 

• A tax of between 10% and 20% on every product imported from all U.S. trading partners (including Mexico, Canada and the European Union) is also under consideration. 

Energy prices and geopolitical tensions are new risks added last year to the matrix that Dodge examines. Last year, Dodge predicted that geopolitical risk would remain intense, with tensions easing in the first three to six months of 2024. This year, Dodge is forecasting a “fairly stable geopolitical situation.” “That’s not saying things will get better or that they’re going to get worse,” says Branch. “Basically, there’s no change from the situation now.” 

The high impact of imported materials 

New tariffs on imported materials could lead to higher costs, says Guckes. “Certain proposed policies risk triggering higher construction costs,” he continues. “Tariffs on imported construction goods, which would raise the price of these goods, may lead to a second spell of construction inflation.” 

“Supplies have been pretty ample, and prices have come down a lot over the past year,” says Simonson. “But all that can be undone if President-elect Trump does impose across-the-board tariffs. When he did that for steel and aluminum—a 25% tariff on steel, 10% on aluminum—the domestic producers immediately matched those price increases. It’s not guaranteed that all prices will go up as much as the tariffs, but you can count on extensive increases.” 

Facing the talent shortage 

“The labor market has been solid up to this point. We can expect it to continue to be so.” —Richard Branch, DCN 

The construction industry continues to struggle with a significant talent shortage, with an average of 382,000 job openings each month from mid-year 2023 to 2024, marking the third consecutive year of increased vacancies.  

The industry is also experiencing a shift in skill requirements, with Deloitte projecting that 44% of infrastructure roles are expected to evolve in the next five years. The aging workforce is another concern; the National Center for Construction Education and Research projects the average age of trades workers will reach 46 by 2030. Younger generations, who have different expectations regarding work environments, are less interested in construction careers. In a 2024 workforce survey, the Associated General Contractors of America found that 50% of new construction industry hires fail to show up or quit shortly after starting. 

Concern among contractors 

“Quantity of qualified labor continues to be one of the greatest challenges that our industry is seeing and it’s not going to be easily solved, especially if we think about some of the proposed policies by the new administration coming into office next year,” says Guckes. “The construction workforce is very diversified; we benefit from people who come from all over the world. If, for any reason, that pipeline of people is pushed away, then we struggle with an additional supply issue. That means firms will struggle even more so to find enough qualified people.” 

The new administration’s immigration policy will also be extremely important, but Trump’s comments on the issue “have not been encouraging” for contractors, says Simonson. “Construction has always relied more heavily than other sectors on foreign-born workers. And if the border really gets shut down more, and if deportations are part of the mix, that’s going to hit construction even harder than other sectors.” 

Nonresidential construction 

“Commercial construction is fairly coincident with overall economic activity.” — Richard Branch 

Commercial starts on the rise 

• For 2025, commercial construction starts in the U.S. are projected to increase and see modest gains, up 7% ($170 billion) in 2025. — Dodge 

• Spending on nonresidential buildings is projected to increase over 7% in 2024, but then slow to only 2% growth next year. — AIA 

• Nonresidential construction is coming off a strong 2023 and 2024 but is heading for a slowdown in 2025. — ITR Economics 

“The good news here is when you look at 2025, recovery is starting to bloom in commercial construction,” says Branch. Commercial construction, closely tied to overall economic activity, is on the rise, with recovery signs becoming evident for 2025. The data includes new construction, additions and alterations, with trends influenced by inflation. 

AIA agrees that reconstruction activity will impact the construction outlook moving forward. Surveys conducted by the AIA have discovered that about 50% of billings at architecture firms come from work on existing buildings, including additions to existing facilities. AIA expects that the reconstruction share of total construction activity will continue to increase in the years ahead. 

“With the 2025 construction landscape, there is unpredictability,” says Kristy O’Brien, director of content acquisition, ConstructConnect. “But we’ll be paying close attention to how remodels and repurposing of spaces continue to unfold… and if that continues.” 

After soft demand over the past two years, architects are predicting a potential turnaround in 2025, says Kermit Baker, chief economist, American Institute of Architects. A recent survey by the institute found more than two-thirds of its member firms were “somewhat confident” or “very confident” they will see improved business conditions in the next 12-18 months. “Call me an optimist, but I think we’re beginning to turn the corner,” says Baker. “I think we look to be near bottom and should be seeing things pick up again.” 

“If we look forward into 2025 and beyond, we have hundreds of billions of dollars worth of mega projects that we continue to track in our forward-looking databases,” says Michael Guckes. Although some could be delayed into a future year, Guckes says the inventory of existing mega projects if “very encouraging.” 

Some forecasts are projecting a slowdown for nonresidential construction. Nonresidential construction is coming off a strong 2023 and 2024, but is heading for a slowdown in 2025, says Connor Lokar of ITR Economics during his economic forecast at GlassBuild America 2024. “Most of you are busy. You are at the top of the business cycle. … We want you to make sure that we are observing an appropriate amount of caution,” Lokar says. “This is not the Great Recession. This is just a softening.” Lokar believes the market should rebound and “ramp up” in 2026 and 2027. 

Retail starts on the road to recovery 

• Retail construction starts in the U.S. are projected to increase 17% ($24 billion) in 2025. — Dodge 

• Shopping-centered construction will be at 25.6% for 2025. — ConstructConnect 

Retail construction is rebounding, closely tied to residential development. Typically, retail projects follow housing starts by about 12 months, but 2024 retail activity grew even though residential starts declined in 2023. This deviation reflects a focus on underserved areas, where developers are accelerating projects to meet demand. 

This recovery is expected to continue into 2025, bolstered by mixed-use developments that combine multi-family housing with retail spaces. Growth in multifamily projects, particularly those incorporating retail at ground level, is supporting the retail construction sector’s momentum. 

“The strongest linkage between residential and non-residential is in the retail sector,” says Branch. “It’s about 12 months from breaking ground on single-family to breaking ground on retail. In 2023, residential starts declined, but we have retail growth growing in 2024, with retail activity happening in zip codes that were underserved from a retail perspective. This has changed; developers are trying to get in early and accelerate projects through the planning cycle. I think that trend continues into 2025, and you get the bonus of retail construction from the traditional 12-month lag.” 

Leading retail chains are showing a mix of activity dominated by alterations. Walmart and Target are focused on renovations of older supercenters to appeal to suburban and rural customers, and grocery stores, quick-service restaurants and home-improvement chains like Home Depot, Lowe’s and Harbor Freight are seeing strong activity, closely tied to residential development. 

Core office starts to weaken further in 2025 

• For 2025, core office starts in the U.S. are projected to drop 10%. — Dodge 

• While traditional office spending has been declining, spending on data centers has been rapidly increasing. U.S. Commerce Department figures peg data center spending as accounting for over 3% of the overall nonresidential building market. — AIA 

• A focus on artificial intelligence will boost data center construction in 2025, a projected increase of 24% ($35 billion). — Dodge 

Core office construction is expected to weaken further in 2025, with starts down 30% in square footage compared to 2019. Alterations now make up 50% to 55% of the market, reflecting upgrades from Class B to Class A space. The sector is unlikely to regain pre-pandemic levels in this cycle but may stabilize by 2026, with modest growth afterward. 

This trend reflects a long-term evolution, accelerated by the pandemic, similar to the retail sector’s transformation after the Great Recession. While the office market has steadily declined since its peak in 1985, it is likely transitioning into a smaller but potentially healthier and more dynamic phase, according to Dodge. 

“When we take out data centers from our office forecast, it doesn’t look good,” says Branch. “But bear in mind, alteration is usually about 30% to 35% of the market, and right now, it’s closer to 50% or 55%. I would liken this to what happened to the retail sector after the GFC [Great Financial Crisis]. Many said that retail would die as e-commerce took over, but it didn’t die; it evolved. It’s certainly a much smaller sector than it was prior to the GFC, but I would argue that right now the retail sector is actually healthier and more dynamic than it was prior to the Great Recession. I think the same thing happens in office.” 

AI focus to boost data center construction 

Demand for AI, cloud security, backup and national security applications are driving aggressive data center construction growth. A key challenge for future expansion is the high energy demand of data centers. Power availability is becoming a constraint, with companies exploring solutions such as reopening nuclear plants and testing micro nuclear reactors. These factors may limit sustained growth rates beyond 2025. 

“What we have for 2026 and forward is more of a plateau for data centers,” says Branch. “It’s not a decline, but power is a significant issue, and we think this could be a restraining factor to further data center build-out, or at least a continuation of these kind of growth rates once we get past 2025.” 

Upgrade cycle for hotels began in 2024 

• Hotel construction starts in the U.S. are projected to increase 16% ($16 billion) in 2025. — Dodge 

• Hotel construction spending is forecast to grow 6.6% in 2025. — AIA 

• For hotels, solid rebounds (28.7%) are expected in 2025. — ConstructConnect 

• The Q3 2024 U.S. Hotel Construction Pipeline Trend Report reported an 11% increase in projects YOY, with projects scheduled to start construction in the next 12 months and projects in early planning up 17%. — Lodging Econometrics 

The hotel sector has shown strong recovery post-pandemic, with occupancy rates returning to 70% and average daily room rates increasing. In 2024, the sector entered an upgrade cycle, evidenced by a 5% increase in square footage but a significant 31% rise in dollar value, highlighting higher-end renovations and rebranding efforts. 

Alterations dominate the current cycle, with hotels switching chains (e.g., Marriott to Hilton) or upgrading within brands. This mirrors patterns seen after the Great Recession, where initial upgrades transitioned into new construction. A shift to more new hotel builds is expected to begin in 2025. 

“Hotels have been the best news story here in commercial other than data centers,” says Branch. “Occupancy rates are pretty much right back where they were prior to the pandemic, and average daily room rates are growing nicely as well.” 

Hotel construction activity is concentrated in upper-tier and upscale properties, driven by a post-pandemic focus on experience over value, reflecting the strength of leisure and tourism travel. Business travel is also rebounding, supporting growth in extended-stay and mid-market properties without food services. 

However, mid-market hotels with food services are seeing limited activity, potentially due to labor shortages, making it difficult to staff both hotel operations and kitchens. The ongoing upgrade cycle, once initiated, is unlikely to slow down, given the competitive nature of the hotel market. Historically, only major disruptions like the pandemic have paused such cycles. 

“I think the good news on hotels is that once that upgrade cycle starts, it’s really hard to stop. It’s a very competitive market and it took the pandemic to kill the last upgrade cycle,” says Branch. 

“This is a very diverse, very healthy market, coming off a lot of robust activity in 2024.” — Richard Branch 

Institutional building starts to ease in 2025 

• For 2025, institutional construction starts in the U.S. are projected to ease and see modest gains, up 4% ($232 billion) in 2025. — Dodge 

• Institutional construction will see a more than 10% gain in 2024 before slowing to 4% in 2025. — AIA 

Institutional construction is expected to ease in 2025, partly due to its tendency to lag the broader market. However, the sector remains robust, supported by diverse and significant projects breaking ground across the country in 2024. While growth may decelerate after a strong 2024, the market is still characterized as healthy and diverse. 

“Institutional construction tends to lag the overall market, and that’s part of why you see growth accelerating in 2025,” says Branch. “But I don’t want to characterize this market as losing momentum, because if you look at the largest projects breaking ground, this is a very healthy market with very diverse projects, coming off a lot of robust activity in 2024.” 

Health starts poised for growth 

• For 2025, healthcare construction spending in the U.S. is projected to see modest gains, up 11% ($51 billion) in 2025. — Dodge 

• Health care construction, which saw growth throughout the pandemic, is poised for a 7% gain in 2024, and an additional 4% next year. — AIA 

• Publicly funded healthcare projects may not see a softening as soon, or as much, as privately funded projects; however, the market should come back around in 2026. — Connor Lokar 

• Hospitals and clinics (6.4%), and outpatient surgery and imaging centers as well as medical offices (13.6%) are expected to have a strong showing in 2025. — ConstructConnect 

The healthcare market, divided into clinics, nursing homes and traditional hospitals, shows varied trends. Clinic activity remains steady, resembling the retail sector with urgent care centers often located in commercial hubs. Hospital construction is increasing, driven by the development of hub-and-spoke systems linking clinics and hospitals, as well as mergers and acquisitions in the industry. Meanwhile, nursing homes have seen a 20% decline in square footage since the pandemic, with a shift towards active adult and independent living communities. 

Education starts trending up, lab projects slipping 

• For 2025, education construction spending is projected to modestly increase 8% ($96 billion). — Dodge 

• Much of the projected growth in the overall institutional sector will be generated by the education market, an increase of 4.4% in 2024. — AIA 

• Publicly funded education projects may not see a softening as soon, or as much, as privately funded projects; however, the market should come back around in 2026. — Connor Lokar 

• For education, a soft rise (0.5%) is expected in 2025. — ConstructConnect 

The education market—comprising kindergarten to grade 12 schools, colleges and universities, and laboratories, is experiencing mixed trends. Growth for K-12 is supported by favorable demographics in the Sunbelt and western states (excluding California), offset by weaker growth in the Midwest and Northeast. State funding is expected to dip in 2025, but strong local funding from higher property values should balance this. 

Demographic trends for colleges and universities are weak, with high tuition costs prompting more deferred enrollments, though vocational and trade school enrollments are rising. Competitive pressures among institutions to improve facilities create opportunities for construction projects. And after a surge during the pandemic, lab construction is now correcting and cycling back. 

Overall, education construction is projected to grow 8%, with K-12 outpacing the average, colleges at the average, and labs and other sectors (libraries, museums) lagging slightly. 

“The great thing about the college and university sectors is that it’s very competitive, a lot like the hotel sector in the sense that there’s a race within colleges to have the best facilities and labs,” says Branch. “We saw a big uptick due to scientific initiatives in the wake of the pandemic, and then a bit of a correction happening. Now, lab construction is starting to cycle back.” 

Residential Construction 

“Single-family residential construction leads the economy into recovery, and it leads the economy into decline.” — Richard Branch 

“What’s happening in the residential market is key to understanding what’s going to happen in the nonresidential space,” says Branch. “The demographics are fairly positive. We’re looking at 2.5 million new households, created between 2024 and 2025, so much faster than what we saw just prior to the pandemic. And a lot of this new household formation is taking place in ‘Sunbelt States’ where there’s a lot of pent-up household demand.” 

Single-family decelerating into 2025 

But this growth couldn’t come at a worse time, says Branch. “The housing market is woefully under-supplied; our measure of the shortage is around 1.2 to maybe 2.2 million units.” Upward pressure on housing prices will keep younger and less-affluent Americans from the single-family side of the residential market, forcing them into the multifamily market. 

“Single-family hit a trough back in early 2023 and has been rising steadily since then,” says Branch. “Single-family units this year-to-date through September are up 18%. We expect the fourth quarter for single-family housing to be essentially flat. New home sales are up around 3% year-to-date for 2024. It looks like construction is a bit ahead of the market, and that’s part of why we have single-family decelerating into 2025.” 

Multifamily starts accelerating into 2025 

Multifamily construction has been in a slump for the past 21 months, and completions for multifamily have been trending down since then, but Branch sees multifamily starts accelerating into 2025. “If you look at the multifamily vacancy rate, it’s gone up about 7,500 basis points over the last year,” says Branch. “This is still a fairly robust (and tight) market. Add on crowding out of the market and continued affordability issues on the single-family side, I would offer it can safely absorb more.” 

Retail recovery is expected to continue into 2025, bolstered by mixed-use developments that combine multifamily housing with retail spaces. Growth in multifamily projects, particularly those incorporating retail at ground level, is supporting the retail construction sector’s momentum moving forward. 

“Multifamily planning projects actually troughed back in November 2023 and have been trending higher since,” says Branch. “It takes somewhere around 17 months for a multifamily project to transit from planning to groundbreaking, so 17 months from November 2023 puts a trough in starts activity in early 2025. We think the planning data is telling us that there could be fairly aggressive growth in 2025 multifamily.”