As 2025 closes, the construction industry faces a complex 2026 marked by elevated costs, persistent labor shortages, and policy uncertainty—yet industry analysts point to cautious optimism driven by potential fiscal stimulus and easing interest rates. Nationwide's Year-End 2025 Construction Industry Report provides comprehensive analysis of trends shaping the year ahead for contractors, developers, and construction professionals.
Released December 3, 2025, the Nationwide Economics report examines nonresidential and residential construction spending, labor markets, input costs, and sectoral dynamics to help industry participants prepare for 2026.
Nonresidential construction slowed significantly in 2025 due to high costs and elevated interest rates, though data centers emerged as a notable exception to the broader slowdown. The data center sector's strength reflects ongoing AI investment and digital infrastructure demand.
According to the Nationwide analysis, easing monetary policy and reduced policy uncertainty could revive nonresidential construction activity in 2026. However, the outlook remains uneven across sectors. Commercial gains have been largely limited to education, health care, and technology sectors, with traditional commercial construction experiencing pressure.
Construction activity outside of data centers is expected to remain soft into early 2026 as tariffs and consumer demand uncertainty continue to weigh on business investment decisions. The report notes that this weakness may persist through the first half of 2026 before potential improvement in the latter half of the year.
For contractors and construction managers, the 2026 outlook demands strategic planning around several key variables. The potential for tariff-driven cost increases, labor constraints, and policy shifts requires that firms maintain flexibility in scheduling, cost estimation, and workforce planning.
Contractors should anticipate that:
• Labor demand may remain constrained even as construction activity begins to recover later in 2026
• Input cost pressures may persist, particularly for materials subject to tariffs (copper, steel, plastics)
• Financing availability may improve if interest rates decline, potentially accelerating project starts in the latter half of 2026
• Federal tax incentives could create concentrated demand spikes in specific project types
The construction labor market presents a paradox: job openings are falling due to slower residential and nonresidential activity, yet labor shortages persist. This contradiction reflects fundamental structural issues in the construction workforce.
According to Nationwide's analysis, the lack of experienced workers due to widespread retirements remains the primary driver of labor shortages. Simultaneously, tighter immigration policies continue to restrict labor supply, compounding the challenge.
The result is consistent upward wage pressure. Hiring is expected to remain constrained in 2026 even as construction activity begins to recover, meaning that firms will struggle to find qualified workers to staff expanding projects. This dynamic effectively creates a ceiling on how quickly construction activity can scale up, even when financing and market demand improve.
For contractors, this means:
• Wage pressures will likely persist throughout 2026 and beyond
• Workforce training and retention programs become increasingly valuable as a competitive advantage
• Labor productivity improvements (including automation and digital tools) become more critical to profitability
• Geographic variation in labor availability will continue to shape project economics and feasibility
Construction material prices remained mostly stable in 2025, with tariff-related increases delayed but expected to rise as inventories deplete, according to the Nationwide report. The timing of tariff impacts remains uncertain, but cost increases appear inevitable in 2026.
Trade policy uncertainty and tariffs on key imports—copper, steel, and plastics—may continue to push input costs higher in 2026. However, the report notes that federal tax incentives could stimulate domestic production, potentially offsetting some tariff impacts.
The practical implication for contractors: supply chain management and financial planning become critical tools for managing margin protection. Firms that effectively hedge material costs or secure long-term supply agreements may gain significant competitive advantage over those managing costs reactively.
Nationwide's Construction Practice Leader Tonya Hahn emphasized this point: "Specialized insurance and risk management advisors are well-positioned to support clients through this transition, offering protection strategies that align with both current challenges and emerging opportunities."
Spending and hiring for building construction declined in 2025 due to elevated interest rates and policy uncertainty. Manufacturing construction, which benefited from the 2022 CHIPS Act, has slowed after earlier gains.
Commercial construction remains uneven amid tariff disruptions and mixed demand signals. However, the report identifies potential recovery drivers for 2026:
• Improved economic conditions and policy clarity could gradually revive building activity
• Federal tax incentives could trigger concentrated demand for specific project types
• Interest rate easing would improve financing availability and project economics
The report cautions, however, that reduced government spending may limit infrastructure investment, creating uneven recovery across sectors. Building construction dependent on public funding may face headwinds even as privately-financed projects accelerate.
Federal infrastructure funding has been a significant bright spot for construction activity, driving strong growth in highways, streets, water systems, and sewage projects. This activity has supported heavy and civil engineering construction despite high labor costs and barriers to market entry.
However, a critical inflection point approaches: The Infrastructure and Jobs Act of 2021 is scheduled to expire in October 2026. Additionally, broader efforts to reduce government spending could slow future project flow.
This creates substantial uncertainty for firms relying on public infrastructure contracts. Contractors should:
• Monitor project pipelines carefully to understand timing relative to IIJA funding expiration
• Accelerate project pursuits for work that must be completed before October 2026 to maximize available federal funding
• Develop strategic plans for managing capacity if public infrastructure work declines significantly
• Consider diversification into privately-financed or other publicly-funded construction categories
Specialty trade contractors faced mounting challenges in 2025: rising labor costs (particularly for electricians), material cost pressures (copper, steel, plastics), and continued worker shortages. Residential demand weakened due to elevated mortgage rates, compressing margins for trade contractors serving home builders.
However, nonresidential employment continued to grow, narrowing the gap between residential and nonresidential specialty trade activity.
Looking ahead, the Nationwide report suggests potential relief in 2026:
• Stabilizing input prices as tariff impacts are absorbed and supply chains adjust
• Federal tax incentives that may stimulate demand for specific project types
• Potential interest rate easing that could revive residential construction demand
The caveat: these positive factors depend on policy clarity, trade policy moderation, and economic conditions improving faster than currently forecast.
Construction businesses should prepare for 2026 by:
1. Managing Cost Pressures Proactively
Lock in long-term material supply agreements where possible. Develop detailed cost estimation models that account for tariff scenarios. Build flexibility into pricing strategies to protect margins.
2. Addressing Labor Constraints
Invest in workforce training and retention. Explore automation and digital tools to improve productivity. Plan capacity around realistic labor availability. Consider geographic strategy shifts to access better labor markets.
3. Positioning for Potential Upside
Monitor federal tax incentive programs that may stimulate demand. Prepare project pipelines to capitalize on potential acceleration if interest rates decline. Develop financing strategies that position clients and firms to move quickly when opportunities emerge.
4. Hedging Policy Risks
Work with insurance and risk management specialists to develop strategies that protect against tariff impacts, labor cost escalation, and policy changes. Maintain financial flexibility to weather extended uncertainty periods.
5. Monitoring Infrastructure Expiration
Track IIJA funding timelines and project pipeline implications. Plan workforce adjustments and capacity management around October 2026 expiration.
The Nationwide Economics Year-End 2025 Construction Industry Report offers measured optimism tempered by realistic assessment of headwinds. 2026 will likely be a year of bifurcated construction activity—continued strength in data centers and select sectors, persistent weakness in traditional commercial and residential, and infrastructure strength with an expiration cliff in October.
For contractors and construction companies, success will depend on strategic planning, cost discipline, labor management excellence, and proactive risk management. Those firms that effectively navigate cost pressures, labor constraints, and policy uncertainty while positioning for upside opportunities will be best positioned to thrive in 2026.
Source: Nationwide Economics Year-End 2025 Construction Industry Report, December 3, 2025; Bureau of Labor Statistics; Census Bureau; Haver Analytics
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