Issue 55 – First Quarter 2026
The construction industry continues to be defined by surging data center work, broader nonresidential weakness, and a residential segment that is struggling under the weight of high mortgage rates. The conflict in Iran has upended the outlook, putting renewed upward pressure on material prices and borrowing costs.
The Good
Data Center Construction
Data center construction spending continues to soar and will soon exceed a $50 billion annual pace. Given recent compute constraints on frontier AI models, it appears that this boom will continue for some time.
The Strictly Okay
Construction Employment
Construction added a tepid 9,000 jobs in April, but the industry’s ongoing labor market weakness is largely due to a struggling residential side of the industry. The nonresidential segment has actually added jobs at a brisk pace in recent months as the data center boom spurs demand, especially for certain specialty trade contractors like electricians and HVAC workers. Barring a sudden decrease in mortgage rates, these dynamics—nonresidential strength and residential weakness—will continue over the next few quarters.
The Bad
Manufacturing & Residential Construction
Manufacturing-related construction spending remains in absolute free fall as CHIPS Act-incentivized megaprojects wrap up. While spending in this category is still extraordinarily elevated above pre-CHIPS Act levels, it will continue to decline over the next several quarters.
Residential construction spending has picked up from the May 2025 cyclical low but remains way below 2022 levels. Persistently high interest rates have weighed heavily on new single-family and multifamily construction activity,
The Ugly
Interest Rates, & Materials Prices
The conflict in Iran has pushed Treasury yields significantly higher, and that has caused a rebound in borrowing costs. Commercial construction lending standards have tightened on net in each of the past 17 quarters, according to the Federal Reserve’s Senior Loan Officer Opinion Survey. The upshot is that high financing costs will continue to weigh on construction activity.
Construction material prices surged in March and are now up 4.8% on a year-over-year basis. That’s the largest annual increase since January 2023. Much of the recent rise was driven by higher oil prices, a factor that will put upward pressure on other input prices in the months to come.
