Q2 2025 Construction Industry Analysis

The U.S. construction sector is entering 2025 on strong footing but facing significant crosswinds. Total construction starts are forecast to grow nearly 9% this year (Dodge Construction Network, 2024), driven by an unprecedented wave of public infrastructure funding, steady demand in manufacturing and data center construction, and a tentative recovery in single-family housing.

At the same time, the industry remains constrained by elevated borrowing costs, volatile materials pricing, and persistent labor shortages straining project timelines and contractor margins (AGC of America, 2025).

Economic Conditions Are Improving, But Costs Remain High

While the Federal Reserve began easing monetary policy in late 2024 (Federal Reserve Board, 2024), borrowing costs remain high compared to the last decade. After rate cuts of about 100 basis points in late 2024, additional reductions are anticipated through 2025, which may eventually bring the federal funds rate down to approximately 3% (S&P Global Economics, Q1 2025).

General inflation has moderated to around 3–5%, yet construction input costs have started climbing again (Bureau of Labor Statistics Producer Price Index, March 2025). Steel, aluminum, and lumber prices are all seeing renewed volatility, in part due to new tariffs and supply chain disruptions (Engineering News-Record, April 2025).

Policy uncertainty remains high. The Administration’s sweeping tariffs on imported materials—25% on steel and aluminum—and potential expansions on other products are introducing significant pricing risk (AGC of America, 2025). Immigration enforcement, especially against undocumented workers, is expected to worsen the labor shortage already affecting skilled trades (AGC, 2025 Workforce Outlook). At the same time, accelerated permitting for infrastructure projects is helping offset delays and soft costs in some regions (ENR, March 2025).

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Materials Volatility Returns After Brief Relief

One of the most important factors influencing contractor profitability and creditworthiness is the trajectory of building material costs. After a period of relative stability in late 2023, input costs accelerated sharply in Q1 2025. The Bureau of Labor Statistics reported that construction input prices rose 0.8% year over year in March, but on an annualized basis were rising at nearly 9.7% (BLS PPI, March 2025).

Steel mill products spiked almost 6% in a single month after new tariffs were announced (ENR, April 2025). Aluminum prices increased over 1.7%, while lumber futures climbed as distributors reacted to anticipated tariffs on Canadian wood imports (Wall Street Journal, March 2025).

Electrical gear remains especially constrained. Contractors report long lead times for transformers and switchgear—some components are delayed 12–18 months—due to both production bottlenecks and surging grid upgrade demand (AGC Survey, 2025).

To manage these challenges, many builders are securing materials early, locking in prices, and relying heavily on escalation clauses. However, these strategies often tie up significant working capital, increasing liquidity strain (Rabbet Construction Payments Report, 2024).

Residential Construction: A Cautious Rebound in Single-Family Starts

The residential sector is starting to regain momentum after the downturn that followed the pandemic housing boom. Single-family housing starts rebounded by more than 15% in 2024 (Dodge Construction Network, 2024) as mortgage rates stabilized and builders offered incentives. For 2025, Dodge forecasts growth of nearly 9.5%, with demand strongest in the Sun Belt, especially Texas, Florida, and the Carolinas.

Multifamily construction presents a more mixed picture. Dodge expects a +15.7% rebound in starts as financing eases (Dodge 2024–2025 Outlook), while the National Association of Home Builders projects continued softness, particularly in urban markets that saw heavy construction during 2021–2022 (NAHB, March 2025). Many apartment developers remain cautious amid elevated vacancy rates and tighter lending standards.

Remodeling and home improvement spending, which surged as homeowners stayed in place during the pandemic, is likely to plateau in 2025. Nonetheless, this segment still accounts for about 40% of residential construction spending (Harvard Joint Center for Housing Studies, 2024).

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Nonresidential Construction: A Two-Speed Recovery

Nonresidential construction remains uneven. Data centers are experiencing explosive growth, with starts up 55% year over year in 2024, driven by demand from AI, cloud computing, and 5G networks (CBRE, Data Center Market Report, 2024). Healthcare construction is also expanding, with hospital and outpatient facility starts forecast to grow another 10% in 2025 (FMI Corp, 2025 Forecast).

Manufacturing construction declined by about 19% in 2024 as several semiconductor and EV battery megaprojects broke ground the prior year. But Dodge expects nearly 9% growth in 2025, spurred by CHIPS Act and IRA incentives (Dodge, 2025 Outlook).

Office construction remains the weakest segment. High vacancy rates in major markets and a shift to hybrid work have left many planned towers indefinitely paused. According to AGC’s 2025 contractor sentiment survey, a net –3% of firms expect office construction volume to decline further this year (AGC 2025 Outlook).

Warehousing has also cooled as e-commerce companies digest pandemic-era overexpansion, while retail construction is recovering modestly as developers revitalize older malls and build new grocery-anchored centers.

Infrastructure Construction: A Historic Funding Surge

Infrastructure is the sector’s most robust growth engine. The Infrastructure Investment and Jobs Act (IIJA), combined with state and local funds, is driving record investment in highways, bridges, water systems, and energy infrastructure. According to Dodge, highway and street construction is expected to expand by more than 14% in 2025, following a 12% gain in 2024 (Dodge Construction Network).

Bridge construction saw a 22% jump last year and is forecast to grow another 11% this year as state DOTs deploy federal dollars (American Road & Transportation Builders Association, 2025).

Water and wastewater projects have accelerated as utilities replace aging systems and comply with environmental standards. FMI forecasts 6–9% annual growth in water and sewer construction spending through 2025 (FMI, 2025 Infrastructure Outlook).

Renewable energy investments are also increasing. The Inflation Reduction Act is supporting wind, solar, and grid modernization projects, driving growth in power sector construction despite overall flat utility spending (S&P Global, 2024 Clean Energy Review).

These projects generally carry lower default risk, but many contractors face execution challenges, with shortages of skilled workers and longer material lead times extending project durations (AGC of America, 2025 Workforce Report).

Contractor Financial Health and Payment Behavior

While overall construction revenue has been rising, margins remain under pressure. Persistent wage inflation, rising material costs, and higher debt servicing expenses have squeezed profitability. Subcontractors are particularly vulnerable, as many signed fixed-price contracts before the latest inflation wave and are now absorbing unexpected costs (Euler Hermes, 2025 Industry Outlook).

Payment behavior continues to deteriorate across the supply chain. The Rabbet Construction Payments Report found that average days sales outstanding reached 83 days in 2024, up from about 60 days two years earlier (Rabbet, 2024). More than 80% of contractors now report waiting over 30 days to get paid.

Bankruptcies are increasing. S&P Global reported that U.S. corporate bankruptcy filings reached their highest levels since 2010 in 2024, and construction was among the most affected sectors (S&P Global Market Intelligence, 2025). Insolvencies have primarily impacted small and mid-sized firms with limited liquidity buffers.

At the same time, larger contractors are pursuing mergers and acquisitions to expand capabilities and reduce overhead. Capstone Partners estimated that 35% of all construction M&A deals in 2024 involved specialty subcontractors, reflecting consolidation as a strategic response to both demand and risk (Capstone Partners, 2024 M&A Report).

Regional Trends: Sun Belt Momentum vs. Coastal Weakness

Geography will continue to be a defining factor in 2025. Sun Belt states, led by Texas and Florida, are experiencing strong demand for housing, manufacturing facilities, and highway construction. According to the Bureau of Labor Statistics, Texas added +32,000 construction jobs (+3.8%) year over year by April 2025, while Florida added +12,400 jobs (+1.9%) (BLS, April 2025 Employment Data).

The Midwest is benefitting from large manufacturing investments, especially in Ohio and Michigan, as semiconductor and EV supply chain projects take shape.

By contrast, the Pacific Northwest and Northeast are seeing tepid growth. California lost about –13,300 construction jobs (-1.5%) over the same period (BLS, April 2025), as high office vacancies and rising costs led to project delays. Washington state posted the largest decline in construction employment nationwide, with a –6.6% drop, reflecting stalled office and multifamily projects (BLS, April 2025).

Contractors operating primarily in high-growth regions are more likely to enjoy pricing power and steady backlogs, while those concentrated in slower markets face more competitive bidding and potential project cancellations.

Key Risks and Opportunities in the Year Ahead

Several risks could disrupt the positive outlook. Prolonged high interest rates would squeeze both residential and commercial financing, while new trade conflicts could further escalate material costs. Labor shortages remain a critical bottleneck, as many firms report difficulty hiring skilled trades, a trend likely to persist through 2025 (AGC, 2025 Workforce Outlook).

Payment delays and the resulting strain on working capital will continue to challenge smaller subcontractors and suppliers. According to Euler Hermes, the sector’s overall risk rating was recently downgraded to “fair,” citing slow payment cycles and higher default rates (Euler Hermes, 2024 Construction Risk Report).

Despite these headwinds, opportunities abound. Public infrastructure funding is at record levels. Data center and clean energy construction pipelines are expanding rapidly. Manufacturing reshoring is fueling growth in regions long underserved by large projects. For well-prepared contractors, these trends offer a chance to build stronger market positions and diversify revenue streams.

What Credit Managers Should Do Next

Credit managers should stress-test liquidity assumptions, especially for contractors with fixed-price contracts signed before the recent cost escalation. It’s essential to closely review backlog quality, payment performance, and leverage levels. Monitoring lien filings, aging receivables, and subcontractor default insurance coverage will help identify early signs of distress.

Diversifying exposure across regions and segments—particularly into infrastructure, data centers, and renewables—can help mitigate risk. In many cases, offering flexible terms paired with tighter oversight will support critical suppliers while protecting your portfolio.

If you’d like to explore deeper insights into contractor financial health or strategies for managing trade credit risk, connect with our team.

Sources Cited

• Dodge Construction Network, 2024–2025 Outlook
• Engineering News-Record, April 2025 Materials Report
• Associated General Contractors of America (AGC), 2025 Construction Outlook and Workforce Report
• FMI Corp, 2025 Infrastructure and Nonresidential Construction Forecast
• S&P Global Economics, Q1 2025 Forecast
• S&P Global Market Intelligence, Bankruptcy Filings Report
• Bureau of Labor Statistics, Producer Price Index March 2025 and Employment Data April 2025
• Rabbet Construction Payments Report, 2024
• Euler Hermes (Allianz Trade), 2024 Construction Risk Update
• Capstone Partners, 2024 M&A Activity in Construction