The Long Game: Why Construction's Best Years May Still Be Ahead

Introduction

It's easy, right now, to be pessimistic about the near-term construction outlook. The dominant story-lines impacting national construction for some time has been elevated inflation and interest rate levels. Recently, both those measures are moving in the wrong direction for a recovery to take place. And while data center or other mega project construction can add optimism to the near-term outlook, they are local/regional bright spots -- not national.

It wasn't too long ago that I held optimism for a 2026 recovery of the cement market's three-year slide. Progress was being made on both inflation and interest rates. Mortgage rates, for example, briefly dipped below 6%. Aided by favorable weather conditions, first quarter financial performances were generally upbeat. The bonus was the possibility that the new chairman of the Federal Reserve would take a more aggressive stance in lowering interest rates -- adding strength to the second half of the year and setting a strong platform for 2027 growth opportunities.

That all changed with the onset of the Iran conflict. Higher inflation and interest rates ensued. Unfortunately, there is no clear indication how long these conditions will last. From this perspective, it is easy to paint a dark picture for the construction sector. Such concerns are not misplaced through the remainder of the year.

Take a Step Beyond the Iran Conflict

Look beyond the Iran conflict. With enhanced flow of shipping traffic through the Strait of Hormuz, oil prices will retreat. Supply chains will heal and inflationary pressures will ease. Due to supply-chain rigidities this whole process may take longer than many expect, but they will materialize however gradually. And with the retreat in inflation, interest rates will inch down. This, coupled with an economy that maintains strong footing, particularly in the context of a lower interest rate environment, could position construction activity for a sustained period of strong growth.

Housing: Consider the potential increase in construction activity for housing. A decade of underbuilding, has generated more than a 4 million unit under build -- and it is still growing. Millennial and Gen Z age cohorts are now in their peak family-formation years -- adding further to housing demand. The upside potential to construction activity originating from the residential sector is enormous.

This possibility, however, won't fully materialize until mortgage interest rates drop below 5.5%. The recapturing of pent-up demand probably won't be complete, might be skewed toward multifamily construction due to the high new home average price, and will take years to run its course. The process of readying properties for sale and nesting after the home purchase suggests a strong period of home improvement activity. This all suggests the potential of sustained strength in residential construction.

Nonresidential: Rather acting as a net drag on overall construction activity, the longer-term outlook for nonresidential construction is also exciting. Over the past few years, dynamic growth in data center and on-shoring projects have been offset by adverse fundamentals facing "traditional" nonresidential construction sectors. Plagued by elevated vacancy rates, soft growth in leasing rates and rising maintenance costs, the net operating income (NOI) on commercial properties has suffered. In accessing the risks, banks often tighten the credit conditions for new nonresidential construction.

While the prospects of recovery in traditional nonresidential construction will likely lag the recovery in residential, it will be led by an improvement in NOI. With a strengthening of economic growth in the context of easing inflation and interest rates, vacancy rates will improve. Leasing rates will improve along with occupancy rates. Combined, nonresidential construction will improve as the construction recovery runs its course.

This will all take place with strong, ongoing construction of data centers. Combined these forces will move the nonresidential sector from a net drag to a strong net supporter of growth in construction. And the nonresidential story sweetens when you factor in the construction of energy facilities that are required to support population and data center energy requirements.

Public: There is little doubt we need further investment in public infrastructure. The American Society of Civil Engineers (ASCE) calculates to bring US infrastructure up to "good" condition an investment of $9.1 trillion is required during the 2024-2033 period. Factoring out investments made in 2024 and 2025 and limiting it to 2030 -- leaves the investment required at roughly $5 trillion by 2030.

While the proposed replacement of IIJA, Build America 250 (BA250), is still being negotiated and developed, it stands well short of the funding implied by ASCE. The program proposes $580 billion in surface transportation investment for five years beginning in fiscal 2027. This compares to IIJA five-year spending levels of $550 billion stated in 2021 dollars. Factoring out inflation the new BA250 falls roughly $130 billion below IIJA. It must be remembered that this proposal is a starting point.

Congress' aversion to a more robust spending bill does not lie in a dispute over the need to increase its investment, but rather concerns to adding to enormous existing federal debt. Currently, only 79% of IIJA spending is covered by the Highway Trust fund. That translates into $118 billion in transfers from the general fund.

For more robust spending to materialize, the Highway Trust Fund has to generate more revenue. Higher federal gasoline taxes which are possibly indexed, vehicle miles traveled fees, expanded tolling, and EV charging excise taxes are all being considered. If aggressive actions are taken on each of these fronts -- there is the potential that BA250 funding could run 25% higher and eliminate general fund transfers.

It's not only the size of funding; it's also the focus of this spending. There is a recognition that more than 42,000 U.S. bridges remain structurally deficient and estimated repair costs exceed $400 billion nationally. This, and similar focus on critical highway corridors and water systems, all have very high cement and rebar usage intensities - adding to the long-term public infrastructure's appeal.

Summary

Construction is, at its core, a cyclical industry. Downturns are not permanent conditions --- they are the setup for the next expansion. The current headwinds are real and the near-term outlook remains challenged. But the foundations for a sustained multi-year recovery are being laid.

Housing carries a structural deficit measured in millions of units. Nonresidential construction is moving from drag to driver. Public infrastructure investment, whatever its final form, will be substantial and cement-intensive. These are not speculative --- they are deferred demands that must eventually be met.

The timing is uncertain. A durable recovery requires resolution of the Iran conflict's inflationary spillover, mortgage rates below 5.5%, and a reauthorization of federal surface transportation funding that reflects the true scale of need. None of that happens tomorrow.

But the long game looks good. The industry has navigated worse and emerged stronger. Those who position now --- in capacity, in relationships, in market intelligence --- will be best placed when the cycle turns.

It will turn.