Hard Hat Economics: What’s reshaping nonresidential construction?

Why is nonresidential construction spending shrinking?

Nonresidential construction spending reached an all-time high in April 2025 but has declined steadily since. As of June 2026, the segment had contracted 4.5% from that peak.

Even with a few stiff headwinds buffeting the industry (more on those below), this contraction is at least superficially surprising. Unless you live under a particularly large rock, you’re aware that we’re in the midst of a meteoric and generational boom in data center investment.

Construction spending on data centers is up an astounding 46% over the past twelve months. As of June, data center spending ($52.9 billion) had surpassed other large private construction subsegments like warehouses ($52.6 billion), healthcare ($46.3 billion) and chemical manufacturing ($43.8 billion).

Of the 51 private nonresidential construction subsegments tracked by the Census Bureau, only the electric power generation category remains larger than data centers, and the category’s ongoing strength is almost entirely due to data centers and their outsized demand for electricity.

So, given this generational boom, why is the segment contracting? Four reasons come to mind.

Those aforementioned headwinds are real, stiff and persistent

It is perhaps not coincidental that nonresidential spending peaked in April 2025, the same month that the White House announced the Liberation Day tariffs. Put simply, import taxes have put steady pressure on certain key construction inputs. Prices for inputs made from copper, iron and steel have all experienced double-digit annual percentage increases.

The conflict in Iran and resulting rise in oil prices certainly haven’t helped. Nonresidential input prices, as measured by the Producer Price Index, have risen at a 13.5% annualized rate through the first seven months of 2026. For context, nonresidential input prices rose just 9.0% from the start of 2012 through the end of 2020.

And then there’s the matter of borrowing costs. Treasury yields have risen rapidly over the past few months, and that has pushed commercial borrowing costs up in tandem.

All of which is to say, the cost of delivering construction services has risen (and continues to rise), and that’s made fewer projects pencil out.

Manufacturing megaprojects wind down

The boom in data center construction is only the second most impressive in modern history (at least for now). The most impressive is, of course, the nearly unfathomable surge in manufacturing megaprojects that began in late 2021. At the peak of that boom in June 2024, $1 in every $6 spent on private nonresidential construction projects went toward building computer chip or battery plants.

The construction-intensive parts of those projects, largely spurred on by CHIPS Act incentives, are now winding down, and the collapse in construction activity has been nearly as rapid as the initial ascent.

Source: U.S. Census Bureau

The warehouse boom gets shelved

In 2021, 2022 and 2023, my firm, Sage Policy Group, was approached on a near-weekly basis to look at the fiscal impacts of a proposed warehouse development. It made sense. The pandemic induced firms to stock up on inventory and spurred a massive increase in e-commerce market share, both of which require warehouse space.

These days, we don’t hear so much about warehouse projects. In fact, many of those previously proposed warehouse projects have pivoted and are now slated for data center developments. The resulting decline in warehouse construction activity, while less severe than the collapse in manufacturing projects, has been deep and persistent, with spending in the subsegment down 38% from the April 2023 all-time high.

Source: U.S. Census Bureau

Rest in peace to general office construction

I hesitate to even mention office-related construction; it’s bad manners to speak ill of the dead.

Okay, that might be a little overdramatic, but only a little. The patient is at best grievously wounded. Spending on general office buildings has contracted by one-third over the past three years, and it’s unclear what can staunch the bleeding at this point. Spending in the category has contracted in each of the past eight months, office deliveries have fallen to a 14-year low, and office vacancy rates remain above 20%. 

Looking ahead

What’s to like about the outlook? Data centers. What’s not to like? Just about everything else. ABC’s Construction Backlog Indicator continues to show that contractors with data center work have much longer backlog (11.4 months) than those that don’t (7.5 months). Those dynamics are unlikely to change in the near future.