The State of the Construction Economy: What to Expect in 2026

In Short

• Reconstruction and adaptive reuse are taking a larger share of work in a volatile market.
• Data centers and $1B+ megaprojects are fueling growth, even as other sectors lag.
• To win in 2026, firms need tight cost control and disciplined, strategic bidding.

Construction Economy Outlook: Where the Market Stands Heading Into 2026

As the calendar turns, the construction economy is entering a familiar season: uncertainty. Still, uncertainty doesn’t mean inactivity. It means the market becomes uneven—with clear winners, soft spots, and real opportunity for firms that stay sharp.

At a recent Construction Economy Outlook hosted by ConstructConnect News, experts from ConstructConnect, the American Institute of Architects (AIA), and the Associated General Contractors of America (AGC) shared what they’re watching—and what contractors should do next.

How is the construction economy doing overall?

The big picture remains mixed, but there are signs of near-term growth:

• GDP: The U.S. economy is expected to see modest growth in 2026, while long-term interest rates remain volatile amid inflation concerns.
• Construction activity: Reconstruction is becoming a bigger slice of the market, driven by aging building stock and ongoing economic volatility.

What’s happening in residential construction?

Mortgage rates eased slightly in the second half of 2025, but affordability is still keeping many buyers on the sidelines. AIA Chief Economist Kermit Baker pointed to a U.S. News survey suggesting roughly 50% of potential buyers would re-enter the market if rates hit 6%.

At the same time, housing shortages persist—but solutions are scaling:

• ROAD to Housing Act (Oct 2025): The U.S. Senate passed a bill directing HUD to develop best practices for municipalities to expand local housing options.
• ADUs: Accessory Dwelling Units now make up nearly half of new single-family units in California—up from 5% seven years ago, per Baker.
• Office-to-residential conversions: Manhattan has added 10,000 housing units since 1992, with more conversions underway.

Baker’s takeaway: conversions and adaptive reuse aren’t a short-term fad—they’re becoming a durable strategy for both housing supply and underutilized buildings.

How are labor and materials affecting costs?

Labor: higher wages, cautious optimism

Labor remains tight, and firms are paying to compete:

• Construction wages are rising faster than the broader economy, with increases exceeding 4% annually, according to AGC Chief Economist Ken Simonson.
• Job openings have dropped, but layoffs and quits remain low, suggesting firms are cautious—but not panicking.

Simonson noted that workers aren’t seeing a clear advantage in job-hopping right now, which aligns with AGC survey findings on workforce expectations.

Materials: tariffs are pushing prices up

Tariffs are increasing costs for key inputs—and that pressure is showing up in project timelines:

• Steel: up 13% year-over-year
• Aluminum: up 23%
• Copper products: up 4.9%
• Tariff-driven increases are contributing to delays and cancellations in some cases.

Simonson also flagged the secondary effects: some manufacturers announce investment plans, but many remain vague, while others pause decisions until trade policy and competitive impacts become clearer.

What performed well in 2025?

Even in a choppy year, two categories stood out: data centers and megaprojects (projects $1B+).

Data centers: the standout sector

ConstructConnect’s Christy O’Brien emphasized how resilient this segment has been.

Key U.S. data center stats:

• Starts up 15.1% year-over-year, driven by AI and cloud demand.
• 2025 is the most active year on record for data center projects, with $400B+ in future projects already published.
• ConstructConnect Chief Economist Michael Guckes reported 39 late-stage preconstruction data center projects with planned starts before year-end, totaling $25.5B.

Guckes wrote that if those projects break ground as planned, total data center starts would exceed $58B—more than double the 2024 record—and push the 3-year CAGR in data center starts spending to 98.7%.

O’Brien’s view: data centers remain “the buzzword” for a reason, and AI-driven demand isn’t showing signs of slowing—at least for now.

Megaprojects: reshaping nonresidential momentum

Megaproject activity is surging:

• Through September 2025, megaprojects totaled $134B, a 47% increase over 2024.
• These projects are propping up nonresidential construction, even as other segments soften.

Guckes put it plainly: the megaproject impact “cannot be underestimated.”

What to expect in 2026

The market may remain unbalanced, but builders can still win—especially by leaning into what’s growing and protecting margin where conditions are tight.

Key takeaways for 2026:

• Reconstruction and adaptive reuse (including office-to-residential conversions) will keep expanding in importance.
• Data centers and megaprojects should continue to dominate, though questions remain about how sustainable the pace will be long-term.
• The firms that succeed will be the ones that control costs ruthlessly and bid with discipline to protect profitability.

O’Brien said the 2026 swing factors she’s watching most closely are borrowing costs stabilization and clarity on U.S. trade policy—because those two issues will heavily influence whether private sector activity rebounds or stays cautious.

Baker summarized the current environment as unusually uneven: a few strong sectors, many weak ones, and growing opportunity in reconstruction and conversion work where demand is real and immediate.

And Guckes’ warning is the one contractors should underline: firms have been squeezing margins to keep prices stable—but that’s not sustainable. In 2026, cost control and correct bidding won’t be optional. They’ll be the difference between staying busy and staying profitable.