Industry pivots as U.S. construction sector spending falls
Writer: Mirella Franzese
August 2025 — U.S. builders are scaling down development as construction spending tumbles in 2025, signaling subpar market conditions. From financing hurdles to regulatory challenges, the construction landscape has shifted dramatically, making profitability a tougher target to hit.
“We’ve historically been ground-up developers, but lately, we are acquiring more than we build, despite having the ability to do so,” Cory Atkins, principal of the New Jersey healthcare real estate developer Atkins Companies, told Invest:.
“The biggest hurdle for acquisition and development has been the extremely high construction costs,” added Atkins. “People who want to sell buildings today are not getting the prices that they could have three or four years ago, which is making those owners reluctant to sell.”
According to Matt Sullivan, COO of the property management company The Michaels Organization, high interest rates and elevated capitalization rates have significantly cooled the appetite of lenders and equity partners, leading to a significant reduction in speculative real estate investment.
“Deals are more challenging to close, and capital returns to investors get squeezed,” Sullivan told Invest: reporters.
“A lot of people don’t want to make the wrong decisions, and that has caused a big stall in deal flow,” echoed Atkins, adding that prices for building materials have continued to rise post-COVID, and the labor market remains tight due to increased competition and higher payroll costs. These factors combined eat into margins, delay project starts, and complicate feasibility for many constructors, ultimately impacting spending.
Newly-released U.S. Census Bureau data shows that total construction spending fell short of expectations midway through 2025; 2.9% below the June 2024 estimate of $2,199.8 billion. Construction spending amounted to just $1,036.1 billion in the first six months of the year, down from $1,058.9 billion (2.2%) for the same period in 2024. The American Institute of Architects (AIA) rates this outlook for spending entering this year “very pessimistic.”
Overall spending on nonresidential construction is also likely to increase only 1.7% this year and grow modestly next year to just 2%, according to AIA. The commercial sector remains robust, however, with projected gains of 1.5% this year and 3.9% next year. Construction of institutional facilities is expected to lead the sector with a considerable growth of 6.1% in 2025 and an additional 3.8% in 2026. However, the construction of manufacturing facilities, an “industry bright spot in recent years,” is forecasted to decline by 2% this year, falling by another 2.6% next year.
According to JLL, construction spending is vulnerable to the availability and cost of funding, in addition to interest rates and loan origination rates, which generally have a larger impact on residential construction.
Lower-than-expected spending is a strong indicator of slow sector-specific growth, especially as inflation, regulation, financing constraints, and shifting demographics are all pressing down on the industry.
But with the current challenges comes innovation. From rethinking building materials to repurposing space and pivoting to more resilient industries, U.S. developers are finding new ways to navigate — and even capitalize on — today’s tough market.
Public Incentives and Attainable Housing Models
Companies like the Michaels Organization are taking a three-pillar approach to make residential projects more viable in light of the challenging landscape: free or discounted land, tax abatements, and infrastructure savings. “When we can capitalize on one or more of our three main pillars of attainable housing, we can have a successful project,” said Sullivan. “If we have one or more of those pillars, it allows us to pursue an opportunity and deliver properties with below-market rents. When we can capitalize on (those pillars) of attainable housing, we can have a successful project.” With rent growth still strong in many regions, this model benefits investors while addressing the growing affordability crisis.
Adaptive Reuse
For Atkins Companies, adaptive reuse is a core focus for future growth, particularly turning underperforming office or retail buildings into medical spaces. “Our sweet spot is value-added healthcare facilities,” said Atkins. “Although (former office or retail spaces) are more challenging (to convert)… there are certain things the medical sector expects that traditional buildings do not have. It is more time-consuming and costly; however, in the right locations, conversion may be worth it.” With the healthcare sector booming in key markets, the demand for care facilities continues to outpace supply, making construction in the sector quite lucrative. “Construction costs are extremely high, so even though it can be costly to convert a traditional office building into a medical building, this can still be the cheaper option,” Atkins stated. However, Atkins emphasizes that strategic site selection — sourcing buildings with existing medical spaces — is critical to reducing investment risks and attracting anchor tenants. In public construction, adaptive reuse is also becoming a common practice. “While there has been a lot of attention on new construction, there is also a renewed interest in how to repurpose the city’s existing building stock,” said Joseph & Joseph Architects’ Sustainability Director and Nashville Office Lead Danny Ruberg in an interview with Invest:. “Reusing existing buildings is one of the most sustainable actions we can take.” According to design studio Sizemore’s President Lily del Berrios, the conversion of older or underutilized facilities is gaining traction among educational and government institutions. “Many organizations hold properties that no longer align with their current needs or mission, presenting both a challenge and an opportunity for creative solutions,” Berrios said, adding that the strategy for these organizations is to consider when to invest in renovation versus when to pursue alternative options, prioritizing functional suitability rather than just physical condition.
Betting on Recession-Resistant Sectors
At the same time, many developers are also steering clear of speculative retail and office projects and doubling down on resilient sectors like healthcare. “Healthcare is going to continue to be a strong sector,” Atkins told Invest:. “There is an aging population and a growing population, so healthcare systems are getting bigger and bigger, and there is more private equity moving into the industry.” With reliable long-term demand and strong tenancy, healthcare real estate offers a stable hedge against broader market volatility. Some developers, however, are prioritizing healthcare development exclusively in high-growth markets like the Southeast or Southwest, rather than based on location and tenancy, which Atkins considers a mistake. “Every place needs medical care. Understanding the market, density, and growth of the demographics is more important. You have to just take the regulations for what they are and adapt,” said Atkins.
Innovative Construction Techniques
While Skansa believes that new U.S. tariffs, announced on Aug. 1, will have “little to no effect on construction material pricing,” the new copper tariff could prove expensive for developers. Since the beginning of the year, copper prices surged to record highs over tariff-related concerns with the cost of common diameters of copper pipe — used for wire and electrical components, pipes, HVAC coils, and flashing — up by 30% in 2025. Aluminum prices have also continued to rise.
To mitigate rising costs, developers and design firms like the South Florida-based Carbon Design & Architecture are leveraging new materials and innovation for construction. The South Florida-based architecture company’s new AI Science Center was built with Cross-Laminated Timber (CLT) — a material that costs just $55 per square foot, compared to $600 per square foot for traditional construction. “It’s a promising solution for developers looking to tackle high costs without sacrificing structural integrity or speed,” Carbon Founder Sean Williams told Invest:. “This innovation combines old construction techniques with modern AI and machine learning to keep costs down.”
Looking Ahead
While the current environment remains tougher than in previous years, smart developers are adapting to the new normal, deploying capital more strategically, in addition to leaning into sectors and structures that offer more predictable returns. “Good projects are still good projects,” District Council Co-Chair of the Urban Land Institute in North Jersey Thomas Trautner told Invest:. “The rising costs may impact timelines and require more strategic problem-solving, but if a project presents a strong opportunity and offers a significant return on investment, developers find a way to proceed. The key difference in 2025 is that the margin for error is slimmer. Off-market deals or projects with increased complexity and regulation may no longer be worth the risks for developers given headwinds. However, Trautner emphasizes that with careful underwriting, smart partnerships, and cost-conscious execution, building in America — while difficult — can be profitable.
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