The construction industry is facing accelerated division along regional lines. Data center construction, along with the infrastructure built to support it and downstream consumers, demands skilled trade labor and materials in specific metro markets, creating pockets of acute cost and schedule pressure even as national aggregates understate the problem. With this broader market concentration and contraction, fewer active contractors chasing more specialized, high-value work remains a persistent undercurrent.
Labor shortages, trade policy pressures and geopolitical disruptions are accelerating construction cost escalation, with further increases expected in the second half of 2026. According to JLL’s 2026 Construction Perspective: U.S. Mid-year Update, recognizing these overlaps and acting before contractors reach capacity is the defining factor separating manageable projects from constrained ones.
Structural Labor Shortages
The labor shortage in the construction sector is structural, not cyclical. U.S. construction employment growth is tracking at a meager 0.6% in 2026, falling well below the 2.7% historical average. An aging workforce, a narrow pipeline of new trade workers and an environment that has reduced the supply of immigrant labor have combined to create a permanent shortage that unemployment figures fail to capture.
Overall, this is a geographically locked procurement problem. Trades are locally credentialed, regionally organized and project-bound: they can’t easily migrate to new markets to improve labor shortages. Currently, 61% of U.S. metro markets are supply constrained; where pipeline growth outpaces labor force growth. This figure expected to rise to 72% by 2027.
The localized bottleneck is further squeezed by a persistent, structural million-job gap across the skilled trade sector. For every five workers who retire, only two replacements enter the workforce, a dynamic that JLL Research projects could leave up to 2.1 million skilled trade positions unfilled by 2030, with economic losses reaching $1 trillion annually.
Unfortunately, available labor is not concentrated in the markets with the most quickly expanding construction pipelines. In areas near active data center projects – notably Baltimore, Dallas and Pittsburgh – spillover competition for specialty trades has pushed building cost indices to approximately 7% year-over-year, nearly double the 4% national average. This divide is illustrated by contractor backlogs: contractors with data center exposure carry an average backlog of 12.2 months, compared to just 8.3 months for those without, according to the ABC Construction Backlog Indicator.
Trade Policy and Tariffs
Trade policy no longer just exists in the background; new and existing tariffs are impacting project costs directly. However, rather than uniformly changing costs, recent tariff restructurings have redistributed pressures across project types, based on materials, equipment and furniture needed.
A narrow group of equipment, mostly mobile machinery and certain HVAC systems, caught a temporary break: effective rates dropped to 15% through 2027, but that relief doesn’t reach the metals driving most project budgets. Office fit-out and interior upgrade projects face their own cost pressures too, driven less by a direct tariff on furniture and more by a change in how the customs value of imported materials is calculated, which effectively widens what can be taxed. Additionally, a pending federal review could stack new duties on top of existing tariffs, pushing effective rates on some materials past 50%.
Materials costs are already climbing faster than overall prices, and contractors have little room left to absorb that gap through their own margins, so bid prices are set to keep rising through the second half of 2026. And nothing here is settled: new tariffs on Canadian imports were announced as recently as late July, overlapping the already strained USMCA Trade negotiations.
Economic and Geopolitical Volatility
At the end of last year, many developers anticipated that 2026 would bring a period of stabilization, aided by anticipated interest rate cuts. Instead, the first half of 2026 has altered those expectations. At the June Federal Open Market Committee meeting, the median interest rate projection shifted to 3.8% by year-end, up from 3.4% in March, with nine out of 18 participants projecting a rate hike rather than a cut. The anticipated interest rate offset is not delayed – it has been removed from near-term expectations.
This shift, compounded by current geopolitical disruption, is adding cost complexities that domestic policy can’t fully address. Energy cost increases driven by ongoing global conflicts have increased the price of site operations, transportation and the production of energy-intensive materials globally.
As a result, construction materials produced in these highly energy-exposed foreign economies carry higher intrinsic costs that directly impact U.S. project estimates. This divergence is highly visible in commodity pricing: copper is up 36% year-over-year, aluminum is up 45%, and U.S. HRC steel is up 27%, even as Brent crude has dropped 38% from its April peak. In short, construction materials are simply not following energy price trends.
What Comes Next: A Shift in Procurement Strategy
We have entered a market that has concluded that economic relief is not coming, and contractors are pricing their 2027 and 2028 bids accordingly. According to the ABC Contractor Confidence Index, roughly three in four contractors across size categories expect profit margins to stay the same or expand over the next six months, a level of confidence not seen since early 2025. The market has clearly adjusted its pricing to an elevated baseline.
To navigate this complex environment, CRE leaders must shift to a structural procurement strategy:
- Engage partners early. Waiting to engage partners is a legacy strategy that will not succeed in the current market. Early contractor engagement is essential to capture both availability and terms.
- Utilize mid-to-small-size contractors. For owners who don’t overlap with active data center regions or draw heavily from the same specialty trade pool, mid-to-small contractors can offer a window of contractor availability and scheduling certainty, rather than relief from overall cost pressures. Moving forward with these partners secures capacity and timeline reliability as broader commercial demand recovers.
- Implement dynamic risk-sharing. Owners should work collaboratively with partners to dynamically share risk, rather than forcing contractors to absorb volatility.
Ultimately, early action remains structural, not just directional. In an environment where the mechanisms that would have moderated either cost or labor pressure are no longer in play, organizations that engage now capture availability and terms their competitors bidding later won’t see.
Content and strategies shared on CREDA blog posts are intended to provide information and insights to industry practitioners and do not constitute advice or recommendations. CREDA and its blog post authors disclaim any liability for actions taken as a result of these blog posts.
