Regional construction demand exposes a widening Northeast–Southeast divide

Key points:

• A widening North–South development gap is reshaping construction demand heading into 2026.

• Northeastern markets are pivoting toward adaptive reuse and experience-driven design to stay competitive.

• Office-to-residential conversions are emerging as a critical strategy to offset housing shortages and excess office space.

January 2026 — Construction is facing uneven demand heading into 2026 as the development gap between the Northeast and the Southeast continues to widen.

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While Southern markets are experiencing rapid inventory growth, the Northeast continues to grapple with structural challenges that have curbed both expansion and demand. High construction costs, space constraints, and demographic trends have led architects and developers in markets such as Pennsylvania and New Jersey to shift strategies in order to remain competitive.

“The industry is undergoing a shift toward innovation in building design, with a growing emphasis on quality over quantity,” said Philip Wilkinson, a Pittsburgh-based principal of multi-disciplinary design firm AE7, in an interview with Invest:. “The experience must be engaging and meaningful to attract and retain users.”

According to Wilkinson, this shift reflects evolving user expectations across multifamily, retail, residential, and office sectors. In the office market, for example, lower-quality and less centrally located properties are facing elevated vacancy rates, widening the divide between so-called “trophy assets” and struggling building stock, according to the Urban Land Institute (ULI).

Higher construction costs are also at play. “Rising costs impact (and delay) timelines and require more strategic problem-solving,” explained ULI’s New Jersey District Council Co-Chair Thomas Trautner in an interview with Invest:. 

These region-specific challenges are changing how industry players navigate the competitive real estate landscape. 

Opportunities for development

According to a recent JLL report, the success of U.S. construction activity in 2026 will hinge on adopting new approaches to project delivery and risk assessment that account for rapidly evolving local market conditions.

“All markets maintain development potential when project type, timing and execution strategy align with local conditions,” said JLL experts.

In regions constrained by aging infrastructure, historic character, and dense development patterns, strategies such as adaptive reuse, reconstruction, and value-add projects are emerging as key drivers of new opportunities.

“We now face critical questions around the future of office space,” said Wilkinson. “What do we do with underutilized buildings? How can they be reimagined to contribute meaningfully to the public realm? These questions are central as we reimagine Downtown.”

In Pittsburgh, the goal is to reinvest in ways that transform the downtown core into a vibrant, mixed-use urban environment no longer dependent solely on office demand.

Office-to-residential conversions, in particular, have become an increasingly important strategy nationwide, according to Kermit Baker, chief economist at the American Institute of Architects (AIA).

“Over 25,000 multifamily units (were) created last year from other facilities, and that number has been growing quite rapidly,” Baker told GlassBuild America, highlighting that these units accounted for “a little over 7% of all multifamily units built nationally.”

In metro areas such as New York City, which remain oversupplied with office space, these conversions are helping to offset persistent housing shortages. According to Baker, as many as 10,000 new housing units have been created in Manhattan since 1992 through the repurposing of obsolete office buildings.

Southeast vs. Northeast trends

Despite these opportunities, the Northeast continues to face sharp declines in housing activity, while the Southeastern United States leads the nation in new residential development.

Southern metros including Raleigh, Austin, Charlotte, Nashville, and Atlanta accounted for nearly 60% of all new housing starts in 2024. Lower land costs, greater development capacity, and favorable demographic trends have supported this surge.

States such as Texas, Florida, and Georgia have also benefited from sustained population inflows and corporate relocations, fueling regional construction momentum.

By contrast, demographic shifts are increasingly redirecting housing demand away from the Northeast. Nearly two-thirds of U.S. movers relocated to Sun Belt states last year, while states such as Massachusetts, New Jersey, and Pennsylvania continued to record some of the nation’s highest net outbound migration rates.

The economic impact of this population shift is being felt across the construction industry. Labor shortages remain particularly acute in Northern markets already strained by aging workforces, restrictive immigration policies, and ongoing talent outflows.

Looking ahead to 2026, national construction employment growth is expected to weaken further due to policy pressures, with growth projected to be the lowest since the onset of the pandemic. Northern states such as Maine, Pennsylvania, and New Hampshire are expected to be among the most affected, potentially constraining future development, according to a 2025 labor and visa policy report.

Adapting to change

In response to these pressures, a growing emphasis on experience-driven design and conversion-based development may help mitigate slower growth across the Northeast.

According to Wilkinson, many new projects are prioritizing high-quality, high-finish environments that align with both evolving consumer preferences and local economic realities.

“This principle is especially evident in workplace design, where thoughtfully crafted, collaborative environments are encouraging employees to return to the office,” said Wilkinson. 

Wilkinson noted that Pittsburgh is making measurable progress through initiatives such as the Market Square renovation, which highlights the city’s potential for downtown revitalization.

“These (quality) spaces not only support productivity but also help revitalize local businesses and foster stronger community connections,” he added. “The outcome will determine whether Downtown remains a thriving center of activity or if energy and investment shift to other parts of the city.”

Want more? Read the Invest: reports.