Nonresidential Construction Sector Faces Tapering Growth Amid Shifting Dynamics

Nonresidential Construction Outlook Points to Moderation Post-2024

The U.S. nonresidential construction sector is projected to experience a period of tapering growth from 2025 to 2027. This moderation follows several years of dynamic expansion, largely propelled by distinct, often contrasting, forces within the industrial and public infrastructure segments. The outlook signals a shift in investment concentrations, with implications for contractors, suppliers, and related financial markets.

Shifting Dynamics in Key Construction Segments

The overarching trend for nonresidential construction indicates a gradual slowdown, primarily influenced by a projected peak in semiconductor fab construction while data center construction continues its robust expansion. Public sector spending, bolstered by the 2021 infrastructure bill, will provide a baseline of activity, though its growth phase is concluded.

Semiconductor fabs saw a significant surge in activity following the post-pandemic chip shortage and subsequent federal incentives like the CHIPS Act. However, the industry's historical boom-bust cycles are reasserting themselves. High upfront capital costs and relatively low ongoing production costs often lead to oversupply in soft markets, depressing prices and discouraging new capacity. Experts like Dr. Bill Conerly note that "chip fabs, though, are tapering off." While global fab equipment spending is expected to rise in 2025 and 2026, driven by foundry and memory investments, overall construction project investments in this segment are forecast to decline by 36% to US$30 billion in 2025, albeit remaining higher than pre-2022 levels. This suggests a shift from ground-up construction to equipment outfitting within existing or nearing-completion facilities.

Conversely, data center construction remains a powerful engine of growth, predominantly fueled by the escalating demand for artificial intelligence (AI) capabilities. The AI transformation is still in its early stages, with AI IT spending projected to reach $430 billion in 2025 and exceed $1 trillion by 2029. The market for third-party data center AI infrastructure is forecast to grow from $38 billion in 2025 to $94 billion in 2029. This robust demand necessitates continuous expansion, with large-scale facilities increasingly being developed in secondary and tertiary markets to address land and power availability.

Public sector construction received a substantial boost from the 2021 infrastructure bill, which appropriated $1.2 trillion. While many multi-year projects are still underway, the initial ramp-up phase has concluded. Spending is expected to continue for a few more years before gradually declining as federal funding is exhausted, and infrastructure becomes a less prominent priority for Congress. Non-building starts have seen an 8% year-to-date increase, driven by utilities and highway and bridge construction, up 13% and 8% respectively.

Market Reaction and Economic Context

The mixed signals within the nonresidential construction sector create a nuanced market environment. While segments tied to AI and data centers are experiencing a bullish outlook, the broader construction market, particularly those impacted by the semiconductor retrenchment, faces uncertainty. The DJUSRE index, representing real estate and construction, could see varied performance depending on constituent exposure to these sub-sectors.

Economically, this tapering aligns with broader forecasts for U.S. real GDP growth, which S&P Global Ratings Economics projects to be below potential at 1.7% in 2025 and 1.6% in 2026. Factors such as slower population growth, tariffs, and federal government cost-cutting are cited as restraints. Nonresidential construction specifically is forecasted for a -0.7% change in 2025, followed by modest increases of 1.2% in 2026 and 1.1% in 2027. This slowdown in overall economic activity, coupled with persistent high interest rates, is weighing on both residential and nonresidential investment.

Expert Perspectives and Broader Implications

Expert commentary highlights both the immense opportunity and potential risks. Morgan Stanley Wealth Management's Chief Investment Officer Lisa Shalett has warned of "cracks" in the AI capital expenditure (capex) boom. She questions the maturity of the GenAI capex cycle, noting that "When free-cash-flow growth for the most richly valued names slows or turns negative, not only do valuations come into question, but investors demands for return-on-investment discipline rise." Shalett observes that annual hyperscaler capex spending has "grown fourfold" since 2022, "depleting cash and halting free-cash-flow growth." This perspective introduces caution, even amidst the enthusiastic pursuit of AI infrastructure.

The broader context reveals a construction landscape adapting to technological shifts and economic realities. While office space remains overbuilt in many markets due to remote work trends, specialized needs like suburban medical offices are expanding. The manufacturing sector, excluding chip fabs, has also seen declines, suggesting adequate capacity in most areas.

Navigating the Future: Key Factors to Watch

Looking ahead, several critical factors will shape the trajectory of nonresidential construction and related markets. The most pressing for the burgeoning data center industry is power supply. Data center electricity consumption is projected to more than double, rising to approximately 945 terawatt-hours (TWh) by 2030 from 415 TWh in 2024. The U.S. power demand was up 2.9% year-over-year through August 2025, with data centers accounting for an estimated 8% of total U.S. power demand. Power supply chains are expected to remain a bottleneck through 2030, necessitating data centers to be located closer to liquid power hubs.

Investors will also monitor the actual deployment and economic impact of the remaining funds from the 2021 infrastructure bill. While the peak ramp-up is over, sustained activity in highways, bridges, and utilities will continue to provide support. Furthermore, shifts in corporate investment strategies, particularly regarding AI-driven capex, will be closely watched for signs of sustained growth or potential retrenchment, as highlighted by expert concerns regarding free cash flow generation. The interplay of technological innovation, economic growth rates, and infrastructural limitations will define the investment landscape in the coming years.