Key points covered in this article:

  • At the midpoint of 2025, the construction industry is navigating a mix of cautious optimism and strategic adaptation, influenced by evolving tariffs, clean energy tax changes, and ongoing labor and material challenges.

  • Data center construction remains a standout sector, fueled by AI and cloud computing demand, while infrastructure and select nonresidential projects show steady progress despite economic headwinds.

  • Developers and contractors are prioritizing early planning, flexible designs, and tech-enabled solutions to manage risks and stay ahead in an unpredictable market.

At the halfway point of 2025, the construction industry continues to balance optimism about select markets with caution. New policy developments, including tariffs and potential changes to clean energy incentives, are influencing planning decisions across all segments. Meanwhile, data centers have emerged as a particularly active market, benefiting from high demand for AI and cloud computing capacity. Although not every region or sector is experiencing the same growth pattern, most construction stakeholders share a collective focus on flexibility and strategic planning.

Economic and Market Conditions

Construction starts showed a modest rebound in May, with total starts rising 13% from the previous month, according to Dodge Construction Network. Despite the monthly increase, overall activity remains below 2024 levels on a year-over-year basis.

Material prices remain elevated, with concrete and steel both up by more than 40% since 2020. Labor also remains tight. Although wages have increased, staffing qualified roles remains difficult. A large portion of the construction workforce is getting close to retirement, and that’s in addition to other staffing pressures. Many companies have named recruitment and retention as top priorities, and some are looking at ways to use technology to make up for staffing gaps.

New trade policies are also starting to affect projects. ABC’s latest Construction Confidence Index reported that 22% of contractors experienced a project delay or cancellation in April due to tariff-related issues, up from 18% the month before. Then, in June, tariffs on most imported steel and aluminum doubled to 50%. This is expected to further raise material prices and complicate project timelines for contractors.

A positive development for contractors and owners is the cooling of inflation, which has leveled out near 2.4%. The lower rate offers more predictability for those updating budgets or evaluating financing options. While interest rates have begun to decline, tighter lending criteria continue to keep some new projects on hold.

Legislative Updates

Recently, the Senate Finance Committee released changes to the proposed tax bill, including to the clean energy tax credits that were originally introduced under the Inflation Reduction Act (IRA). The House’s version of the bill would eliminate many of those credits this year. In contrast, the Senate’s version would let the credits phase out more slowly, over about two years.

A key difference is how the Senate ties eligibility to when construction starts, not when the project is finished. That means developers would still qualify for certain credits as long as they begin construction within the allowed timeframe, even if the project takes longer to complete.

Because the proposed tax changes have not yet passed, many of these policies remain up in the air. As a result, developers are re-evaluating their project schedules to stay ahead of any potential changes. For large-scale clean energy projects with long lead times, beginning construction early could be key to securing available incentives before they phase out or shift under new rules.

Sector-Specific Performance

The construction market shows distinctive patterns across nonresidential, infrastructure, residential, data center, and renewable energy sectors.

Nonresidential Construction — Nonresidential work posted an 18% increase in May, helped by a collection of major commercial starts and high-profile institutional designs. That momentum, however, lags behind the same period last year. Recent gains have been concentrated in hotel and healthcare construction, with several high-profile projects drawing industry attention. Notable examples include a multimillion-dollar expansion of university health centers and a $900 million rocket production facility underway in Florida. Despite price escalations, many commercial clients remain willing to invest in upgrades, often motivated by ESG targets or modernization needs.

Infrastructure — The infrastructure segment grew by approximately 20% in May, driven largely by utilities and energy-related work. Highway and bridge construction dipped slightly month over month but continues to benefit from federal funding. Long project lead times and stable financing have helped this segment maintain momentum despite broader market pressures.

Residential Development — The residential sector saw incremental growth in May, up 2% over April. While modest, the increase suggests renewed activity following a slowdown. Developers are exploring adaptive reuse strategies, particularly the conversion of older office buildings into apartments. These projects are gaining traction in urban areas where demand for affordable rental housing is rising. In many cases, public incentives have helped make renovation work more feasible than new ground-up development.

Data Center Growth — Data center construction remains a strong contributor to industry growth. Demand for AI, cloud services, and digital infrastructure continues to drive development. While some large tech companies have paused select builds, others are moving forward with major investments in areas offering lower land costs and reliable power. Contractors involved in this space are managing longer procurement timelines for specialized equipment and working more closely with clients unfamiliar with data center design. Project teams are also evaluating on-site power generation and substation access to ensure grid capacity can support future operations.

Strategic Considerations

The construction market’s trajectory in the second half of the year will depend on ongoing policy decisions, tariff developments, and the industry’s ability to adapt to cost and labor constraints. With inflation at comparatively manageable levels, some owners are looking to move forward with previously paused projects, especially if interest rates continue their gradual descent.

Data center construction is a bright spot, though some worry about oversupply if too many projects come online simultaneously. Some wind and solar projects might stall if updated federal guidelines derail current tax incentives. On the other hand, infrastructure funding sources appear secure enough to maintain moderate growth levels, barring any major legislative setbacks.

Many contractors are using pre-construction services as a strategy to anticipate supply chain issues, manage pricing volatility, and coordinate workflows. Some contractors are working with clients earlier in the project lifecycle to refine designs and evaluate alternative materials. This is becoming an important step, especially when tariffs are in flux and pricing estimates become outdated within weeks. More project teams incorporate modular or prefabricated components to minimize on-site labor requirements and boost efficiency.

Financing models are evolving, too. Some developers are exploring partnerships and alternative funding structures that transfer a portion of the material-cost risk to investors or subcontractors. Meanwhile, technology solutions, from AI-based cost analytics to thoroughly integrated Building Information Modeling (BIM) systems, enable a more transparent look at costs. Contractors emphasizing these methods consistently report stronger risk mitigation during uncertain market phases.

Conclusion

The construction industry is moving through a transitional period, shaped by policy, pricing, and labor availability. Those who stay proactive will be best positioned for the second half of the year. For more information, contact Jennifer French or Ryan Paul, Partners on PBMares’ Construction & Real Estate team.