Construction firms navigate cost, demand challenges in postpandemic era
Q. You just completed your annual outlook survey of contractors across the nation. What is their outlook for 2026?
We labeled it dampened expectations. This is a survey we've done for about 15 years, every November and December. We got 951 responses from all over the country. For me, the key question was, “Do you expect the dollar value of projects available to bid on to be higher or lower than the year before?” We take the percentage of respondents who say there will be more work, minus the percent who say there will be less work and turn that into a figure we call the “net reading.”
This year, of the 17 project types that we asked about, there were only two that people were more optimistic about than they were a year ago. There was a huge jump in net optimism about data center construction. This was already the segment that people were most optimistic about a year ago. This year, 65 percent thought the market would grow in 2026.
Power construction is the other market with greater optimism. The net reading slightly increased to 34 percent, up from 32 percent a year ago. For 10 other kinds [of construction projects], there was still net optimism but distinctly less than a year ago.
For five categories, there were more pessimists than optimists—K–12 schools was slightly negative; higher education was negative by 5 percentage points; lodging was negative by 7 percentage points. Two categories that drew net negative readings a year ago are more negative this year—private office, a net negative reading of -14 percent, and retail, a net negative reading of -18 percent.
Q. What are Texas contractors saying?
Texas contractors are somewhat more optimistic than their counterparts nationally. But nevertheless, it's not the same degree of optimism we saw a year ago. Some of the other categories that there was still optimism about include health care, both hospitals and other facilities, such as those standalone urgent care centers you may see near the highway, diagnostic clinics that showed up after the pandemic or clinics inside drugstores or big box stores, and long-term care, even hospices.
Water and sewer is still positive, although less so. We've already seen several years of growth and spending in both of those categories funded partly through the Infrastructure Investment and Jobs Act [of 2021], but also driven by demands to improve water infrastructure, get rid of lead pipes and deal with so-called forever chemicals that we have in too many water supplies.
There is also positive sentiment about manufacturing, but it's really a mixed category. You have some very strong spending on natural gas liquefaction trains and export terminals. But we've seen a pullback in investment in electric vehicle plants and the battery plants that were going to be supplying those, switching to supplying data centers or utilities.
Q. What are contractors’ primary concerns?
Economic slowdown or recession was the No. 1 concern that was mentioned. Sixty-two percent of respondents said they were concerned about an economic slowdown or recession. That was a bit on the horizon a year before. For most contractors, I think it reflects the hesitancy they've found this year, as well as uncertainty where tariffs or immigration enforcement and deportations are going to lead the economy.
Other major concerns that have cropped up year after year—labor quality, labor cost and labor availability. A small majority (53 percent) also mentioned materials costs. That had been a top-of-mind [concern] during the pandemic and a couple of years afterwards. Then, we had a couple of years of actually declining materials costs. Overall, the fact that it's come back, I think, is a sign that tariffs are definitely affecting construction in many ways.
Q. In which ways are tariffs inflating construction costs?
Steel, aluminum and copper have had extreme price increases. And I think that is very definitely attributable to the tariffs. Even though the producer price index that the Bureau of Labor Statistics puts out is based on selling prices from domestic producers, those sellers are very well aware of the tariffs on imports and, clearly, have been raising their prices.
The producer price index for aluminum mill shapes went up 31 percent last year, December to December. For steel mill products, it was 17 percent higher. And for copper and brass mill shapes, it was12 percent higher. There's a 50 percent tariff on aluminum and steel and a 50 percent tariff on products that contain copper. Now that spills over into construction machinery and equipment, which is big [and has] iron and has a lot of copper, either for wiring or for electronics.
Q. Though homebuilding is outside of your group’s focus, based on what you’ve heard, what is the outlook for the Texas residential sector?
Things have been very grim for both single-family home builders and for apartment developers, and perhaps nowhere more so than in Austin, which had been really booming in terms of adding apartments and attracting new residents. But there's such a glut of apartments that have come to market in the last couple of years, and now Austin has had a drop in effective rents that really lasted throughout 2025.
Personally, I'm faintly optimistic that by the end of this year, we will see a pickup in both single-family and multifamily construction. The mortgage rate—the 30-year fixed mortgage rate—has stabilized for the moment. It's been 6.1 percent for several weeks in a row, according to the weekly survey that Freddie Mac puts out.
That's pretty uncomfortable for somebody who was lucky enough to get a 3 percent mortgage four or five years ago. But nevertheless, as more people pay off their mortgage, they may be able to buy a house for cash, or if they're a first-time home buyer, chances are the developer—the home builder—is going to buy down that mortgage rate for the first year or two or three.
So, I think that there are reasons to believe single-family home building will pick up. The multifamily market does depend more on investors and lenders that have to see that when a new apartment project or condo project is finished, it will be rented up quickly or sold quickly.
Q. How has immigration enforcement affected the construction sector?
We asked survey respondents, “Has your firm been affected by immigration enforcement actions in the past six months?” The survey was conducted in November and December, so the results may not reflect what's going on right now. Nevertheless, what we found was that in Texas, 41 percent of respondents said, yes, that they had been affected directly or indirectly by immigration action.
Twenty percent said a job site or off-site, such as their office, had been visited by immigration agents; 20 percent said workers failed to show or had left the job site because of actual or rumored enforcement action; lastly, 20 percent said they hadn't been affected directly but a subcontractor had been. Construction is subject to scrutiny because it has twice the percentage of foreign-born workers of the overall economy.
That's not to say that they're illegal. The Census Bureau’s American Community Survey 2024 survey showed that 35 percent of construction trades workers were foreign born, compared with 18 percent for the overall workforce. And Texas is one of the top three states for having the most foreign-born workers as a percentage of its construction workforce— 53 percent of construction trades workers in Texas were foreign born in 2024.
Q. How are contractors responding?
Construction firms have been paying higher wages or increasing wages more than the overall economy. We get four different measures of that. One comes with the employment report. It's called average hourly earnings for production and nonsupervisory employees. That's a long mouthful to describe the pay for most construction trades workers and also office workers who aren't supervisors.
The last reading we got on that was for December. It showed wages had gone up 4.5 percent in construction compared with 3.8 percent in the broader economy or the total private sector. The construction wages have been hanging in that 4–5 percent range, while other wage gains have been tapering off as demand for workers has slowed.
There's another measure from the Bureau of Labor Statistics called the Employment Cost Index. It showed very similar things, a 4.1 percent increase for construction versus 3.8 percent for the total private sector from third quarter 2024 to third quarter 2025.
AGC [the Association of General Contractors] supports a group called the Construction Labor Research Council, which analyzes union settlements in construction.
I know that's not a big factor in Texas, but nevertheless, union settlements can certainly influence the pay for nonunion workers. Their report found that the first-year settlements in 2025 came in at a 4.7 percent increase. That was the same as 2024 and much more than the contracts that they were replacing that were signed in 2021 and 2022, with generally 2–3 percent increases or a freeze on first-year pay.
I think it's [wage pressure] being driven partly by this difficulty of finding and retaining workers in an environment where they may be afraid to show up or that the construction sites may be targeted.
Q. What role have tariffs played in construction costs?
About three-quarters of survey respondents said tariffs had affected them. Forty percent said they had raised their bid prices. A third said that they had passed most or all tariff costs on to project owners. And a third said that they had accelerated purchases.
That last option may not be available anymore. As you know, last year, there were a lot of tariffs that were announced and then postponed or modified.
Q. AT&T recently announced it would move from downtown Dallas to Plano. The difficulties downtowns face is a broader issue. What’s going on?
Plano is practically a poster child for drawing in corporate headquarters, particularly from California, especially three to six years ago. I understand that kind of move hit the brakes for a while, so I thought it was noteworthy when AT&T picked Plano as its destination for moving out.
Certainly, cities in general have been struggling with businesses that either have moved out or have hollowed out their workforce in the city. Even though we hear lots of announcements from companies demanding that workers come back full time, often that's to a smaller office space.
In fact, many workers are only coming in three days a week. So that makes it really hard for the related retail and restaurant businesses to survive, because obviously they have to be open, and they're paying rent and utilities every day of the week. If they're only getting customers Tuesday through Thursday and not as many as they may have had, that's one reason that we see a lot of vacant storefronts and a lot of churn among restaurants these days.
There are a few examples, notably Park Avenue in New York and the Hudson Yards [development in Midtown] New York that seem to be attracting really big tenants and even new office construction. But much more of the office construction market these days is for renovation, remodeling and repurposing.
Q. When is construction going to return to a posture of greater growth?
Contractors by nature have to be optimists. And indeed, 63 percent of our members nationally said that they expect their own firm would be increasing headcount in 2026. In Texas, we saw that firms are at least moderately confident that their backlog and bidding pipeline going into 2026 was solid.
What's different was only 46 percent said that the [construction] backlog was bigger than a year ago; 30 percent said it was smaller than a year ago, and 23 percent said it was about the same. We'll just have to see how the economy plays out. It seems to be on kind of a knife edge between slowing employment growth, perhaps even employment decline with stubborn inflation, not runaway inflation, but not getting down to the level that the Federal Open Market Committee would like.
On the other hand, we keep hearing about examples of large investments in manufacturing. Certainly, AI is transforming the economy in ways yet to be seen. And there is lots of demand for data centers and for power construction.
This is an edited and abridged version of a conversation available on the Southwest Economy Podcast.