Construction Economists Warn of Challenges Ahead Amidst Geopolitical Tensions and Material Cost Increases

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Experts from leading construction organizations discuss the impact of the America-Iran conflict on the construction sector, focusing on material costs, megaprojects, and workforce challenges.

In a recent webcast held on May 14, construction economists provided a grim outlook on the potential repercussions of the ongoing America-Iran conflict on the construction industry. Richard Branch, the chief economist at the American Institute of Architects (AIA), joined forces with Michael Guckes, chief economist at ConstructConnect, and Ken Simonson, chief economist for the Associated General Contractors of America, to dissect the current economic landscape facing the sector. Branch articulated that the industry is grappling with multiple challenges stemming from weak economic confidence, a declining labor market, uncertainty surrounding tariff policies, and geopolitical tensions, particularly related to Iran and fluctuating oil prices.
Branch expressed his concerns regarding the Iran situation, stating, "For me, it’s the uncertainty over the Iran conflict and the ultimate impact on oil." He highlighted the significant implications of a major global shipping channel potentially being shut down, which complicates decision-making for developers regarding building projects. He explained that there is a direct correlation between global oil prices and the costs of construction materials, predicting a likely sharp increase in these costs during the summer months.
The discussion also focused on the rise of megaprojects, with Guckes noting that they now constitute a record 26.7 percent of all nonresidential spending, a marked increase from the single digits recorded in 2022. The demand for new data centers remains particularly strong, as these projects require extensive office, power, and water infrastructure. Guckes emphasized the insatiable demand for data centers, stating, "The pipeline of work, the demand for those new data centres, is just insatiable."
Simonson added that the office sector is currently leading nonresidential spending gains, primarily driven by the surge in data centers. He reported that spending on office construction reached $112 billion from March 2025 to March of this year, reflecting a seven percent year-over-year increase. Notably, data centers saw a staggering 34 percent increase, while other private office spending decreased by nine percent and public office spending fell by four percent. Simonson also raised concerns about workforce availability, as the demand for skilled labor, particularly electricians, is drawing workers to various sites across the country, making it challenging to retain these essential workers.
The economists also discussed cyclical shifts impacting the construction sector, noting that construction has been underperforming since 2024 due to high interest rates, sluggish economic growth, and demographic changes, as well as political factors like tariffs and immigration policies. According to Branch, the U.S. economy is surviving but not thriving, with forecasted growth rates of 2.1 percent for 2026 and 2.0 percent for 2027. He remarked that architecture billings have remained soft since late 2022, indicating continued weakness in billings and contracts, despite a slight uptick in inquiries.
The AIA Consensus Construction Forecast Panel anticipates that construction spending will continue to be sluggish, with Simonson cautioning that economic growth remains unbalanced and vulnerable to shocks, particularly from ongoing conflicts in the Middle East. He noted that inflation risks are perceived to be greater than recession risks, with single-family construction expected to gradually recover if mortgage rates stabilize, while multifamily construction seems to be nearing its lowest point.
Looking ahead, Simonson indicated that the most promising growth areas, aside from data centers, will include power projects, airports, and specialized healthcare facilities. Guckes concluded by stressing the importance for contractors to identify thriving sectors and make strategic bidding decisions based on sub-categories and geographic considerations. The webcast was facilitated by Paul Hart, vice-president for economic content at ConstructConnect, with contributions from Kristy O’Brien, director of content acquisition, and Natasha Saladino, senior integrated marketing manager.

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