Nonresidential construction firms across the Federal Reserve’s Ninth District are navigating a more competitive and uncertain market as project pipelines tighten and cost pressures persist, according to the Minneapolis Federal Reserve’s fall construction sector survey.
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Construction activity across the district declined slightly over the past six months, with nearly half of surveyed firms reporting lower activity compared with the same period in 2024. The findings were presented during a Dec. 12 webinar and reflect responses from more than 260 construction firms operating in Montana, North Dakota, South Dakota, Minnesota, northern Wisconsin and Michigan’s Upper Peninsula.
While overall activity has softened, rising costs remain a central challenge. Roughly 80% of firms reported higher input costs, but only 63% said they were able to raise prices charged to clients. That imbalance is squeezing margins and intensifying competition for available nonresidential work, particularly as backlogs shrink and fewer projects enter the pipeline.
Despite slower activity, labor demand remains strong. Nearly half of respondents said they are actively hiring, driven by retirements, shortages of specialized labor and continued demand in select nonresidential segments, including industrial, infrastructure and healthcare construction.
Garcia Luna noted that conditions across the district are uneven, with some firms still reporting growth even as others pull back.
“Construction activity declined slightly compared with the same period last year, with nearly 50% of respondents reporting lower activity, while about one-third reported growth,” he said, underscoring the varied conditions facing contractors across the region.
Residential construction continues to face the steepest challenges, while nonresidential segments have shown greater resilience — though that resilience appears increasingly fragile.
“When you isolate nonresidential construction, particularly industrial and infrastructure, the picture looks a little better,” Garcia Luna said. “There are still pockets of projects that are keeping firms busy, especially in industrial construction.”
However, he cautioned that those pockets may not last. Nonresidential contractors reported shrinking backlogs and fewer requests for proposals, signaling potential softness ahead.
“Uncertainty is keeping some project owners on the sidelines,” Garcia Luna said. “People are still nervous to invest. That wait-and-see attitude is showing up in diminishing backlogs and fewer projects entering the pipeline, and firms expect that to continue into the new year.”
Another key takeaway from the survey and webinar discussion was the persistence of cost pressures and their impact on competition.
“That’s impacting how firms compete for projects,” Garcia Luna said. “Smaller companies, in particular, are losing work to better-capitalized firms that can absorb higher costs or accept tighter margins.”
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Tariff-related uncertainty is compounding those pressures, making it more difficult for contractors to price and bid projects with confidence. While materials such as aluminum remain a concern, contractors are also reporting rising costs for heavy equipment and specialized machinery components, especially on industrial and infrastructure jobs.
“We often think about tariffs in terms of materials,” he said. “But components for machinery, repairs and specialized equipment are also becoming more expensive, and that’s contributing to uncertainty.”
Within the nonresidential sector, data center construction continues to provide some support, though Garcia Luna cautioned that the opportunity is narrow.
“There are only a handful of active data center projects in the district,” he said. “The concern we hear is that these projects are absorbing skilled labor, particularly electricians and pipefitters, which can create shortages for other types of nonresidential work.”
Healthcare construction emerged as a more consistent source of activity, with steady permitting and hospital investment reported across parts of Minnesota and the Dakotas.
“Healthcare is where we’re seeing sustained project flow,” he said. “Outside of data centers and healthcare, it’s harder to identify other segments generating that same level of consistent work.”
Even as activity slows, labor challenges continue to intensify, particularly as experienced workers retire.
“Replacing retiring workers is a challenge,” Garcia Luna said. “In many cases, the skills needed just aren’t easy to find.”
Looking ahead to 2026, contractors’ outlook remains guarded. While expectations vary by market segment, uncertainty continues to shape bidding strategies, hiring decisions and capital investment.
“We’re hearing many of the same concerns we heard earlier in the year,” Garcia Luna said. “That persistence matters. It suggests uncertainty isn’t going away quickly, and firms are planning accordingly.”
Originally reported by Keith Loria in Construction Dive.
