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February 3, 2025

Construction spending rose 0.5% in December, moved entirely by private sector activity. Overall spending ended the year 4.3% stronger. Inputs to construction industries rose only 0.4% compared to a year ago in December. However, the implementation of 25% tariffs on Canada and Mexico and retaliatory tariffs will mean higher construction costs; they are already 36% higher than pre-pandemic.

The US imports essential construction materials from Canada and Mexico; specifically, softwood lumber and gypsum (used for drywall). Softwood lumber is already subject to a 14.5% tariff, bringing the new effective rate to nearly 40%. Canada has already prepared retaliatory tariffs while Mexico has announced it will act as well.

According to Associated General Contractors (AGC), producers have already started to raise prices for a variety of materials. Steel, gypsum and lumber prices have already risen, prior to any new tariffs.

Input costs are only one part of the construction equation: Labor matters significantly as well. According to an AGC survey of builders, the top concerns for 2025 are regarding labor: rising direct labor costs, insufficient supply of workers or subcontractors and worker quality. It is hard to ramp up activity in the labor-intensive construction industry under these conditions.

Private residential construction spending rose 1.5% due to stronger single-family construction, while multifamily lost ground. Builders have pivoted away from starting new apartments as they complete record backlogs. Single-family construction could be stronger due to demographic tailwinds and expectations of lower mortgage rates. Keep in mind, approximately 7% of all inputs used in residential construction are imported.

Private nonresidential construction spending eked out a 0.1% gain in December on office, communication and power construction. Office construction includes data centers, which have hit another new record in spending. The latest ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Asset Management Outlook survey revealed that investors are bullish on data centers, with 40% of respondents believing that data centers will be the real estate asset class that will offer the most meaningful returns in the next 24 months.

Public construction spending slumped 0.5% as federal, state and local government spending all fell. The bulk of construction spending occurs at the state and local levels. Lower revenues and cost cutting will impact governments� abilities to ramp up construction spending this year.