As construction professionals enter 2025, they face a mix of optimism and caution. Several critical factors, including material costs, inflation rates, and interest rates, will significantly influence the industry's trajectory. Economists and industry experts agree that these indicators will play a pivotal role in shaping building activity and financial outcomes. The potential for new tariffs under the upcoming administration adds an additional layer of complexity to the already uncertain landscape.

Material Costs: Balancing Tariffs and Market Dynamics

The construction sector is closely monitoring material prices, which have been volatile due to global trade policies and market conditions. Experts predict that proposed tariffs could disrupt supply chains and increase costs for essential materials like steel and lumber. However, some industry leaders see opportunities for price adjustments as suppliers strive to remain competitive.

Steel and lumber are crucial components in construction projects, and their prices have fluctuated widely over the past few years. According to Luke Lillehaugen, a senior economist at S&P Global Market Intelligence, if a 25% tariff on goods from Canada is implemented, it could lead to significant disruptions in the North American lumber supply. Prices would rise sharply in the U.S., while falling in Canada due to oversupply. Similarly, Christos Rigoutsos, another senior economist at S&P, warns that rebar and wire rod prices could also be affected, given Mexico and Canada's significant exports to the U.S. While tariffs might force global suppliers to lower prices to stay competitive, domestic manufacturers may struggle to meet increased demand without a substantial boost in labor. This scenario could result in higher material costs, putting additional pressure on contractors.

Economic Pressures: Inflation and Interest Rates

Inflation and interest rates are two major economic forces that will continue to challenge the construction industry. Rising material costs, labor shortages, and margin pressures are straining the sector's ability to adapt. Industry leaders emphasize the importance of managing these financial pressures through strategic planning and innovative solutions.

Inflation remains a significant concern for construction professionals. Chad Prinkey, CEO of Well Built Construction Consulting, highlights the need to closely monitor inflation rates, especially after the hyperinflation experienced in 2021 and 2022. Projects that cost $1 million five to six years ago now range between $1.8 million and $2 million, reflecting the escalating costs. To mitigate these pressures, some contractors are turning to value engineering, exploring cheaper alternatives and creative solutions to reduce expenses. Despite efforts to control inflation, Anirban Basu, chief economist at Associated Builders and Contractors, warns that inflation is still above the Federal Reserve's 2% target, suggesting that further rate cuts may not be justified. Meanwhile, modest interest rate cuts in 2024 have improved financing conditions for commercial construction, but the Fed's cautious stance for 2025 means borrowing costs could remain high. Nonetheless, contractors are moving forward with healthy backlog levels, navigating the current economic environment with resilience and adaptability.