The nonresidential construction sector pushed forward through early 2025, but signs of mounting pressure are emerging across the industry. According to recent data compiled by Construction Dive, the market continues to see a mix of strong headline numbers and underlying challenges — a classic case of progress tempered by instability.

Mixed Momentum in Planning and Spending

Planning activity edged up in February, driven largely by a surge in data center development. This sub-sector remains a bright spot thanks to rising demand for digital infrastructure, fueled by AI growth and cloud computing needs. However, this momentum was not evenly distributed. Institutional markets — including healthcare and education — saw reduced activity, reflecting budget constraints and delayed investment decisions by public entities.

Despite the uneven sector performance, total construction spending hit a new all-time high in February. While that milestone may appear to signal robust health, some economists caution against overinterpreting it.

“Although construction spending reached a record high in February, some economists warn it may represent a high-water mark,” the report notes, hinting at potential future slowdowns.

Rising Costs Cloud Outlook

Cost pressures are returning to the forefront. February marked the second consecutive month of rising input prices, with nonresidential construction costs increasing at a striking 9% annualized rate — the fastest pace recorded in two years.

This surge in costs is squeezing profit margins and forcing developers to reassess project timelines and budgets. Smaller contractors are particularly vulnerable, as they often lack the financial cushion and purchasing leverage that larger firms possess.

Tariff Uncertainty and Project Delays

Tariff policy remains a wild card. The Trump administration’s recent stance on trade — including proposed and enacted tariffs on critical construction materials — has added a fresh layer of unpredictability for developers and contractors.

“Tariff uncertainty continues to fuel volatility, prompting some developers and owners to delay projects,” the report says.

These delays are becoming more visible in backlog data. February saw a slight decline in overall backlogs, revealing a growing disparity between large firms engaged in multibillion-dollar megaprojects and smaller builders facing fewer opportunities in the open market.

Labor Trends: Holding Steady for Now

While hiring activity cooled slightly last month — another sign of cautious optimism in the face of macroeconomic uncertainty — the industry did receive one encouraging signal from the labor market.

“On a positive note, contractors posted the lowest February layoff rate on record. That’s a sign they’re holding on to workers in anticipation of a rebound later this year.”

This indicates that many contractors are choosing to retain talent rather than shedding jobs, a move that suggests confidence in longer-term demand even as near-term pressures mount.

Outlook: Bracing for a Bumpy Ride

The construction industry is moving forward, but the road ahead looks anything but smooth. Rising input costs, shifting tariff policies, and uneven sector performance are complicating what had been a post-pandemic recovery story.

Still, with strong sectors like data centers continuing to attract investment and contractors demonstrating resilience in their workforce decisions, there is potential for stabilization in the second half of the year — assuming inflation and trade policy volatility don’t deepen further.

Originally reported by Sebastian Obando in Construction Dive.