As 2025 construction spending slows, uncertainties abound

As 2025 construction spending slows, uncertainties abound

 

Given the volatility of business so far in the 2020s, Washington state contractors shouldn’t be surprised that uncertainty will color conditions for 2025. Contingency planning and risk management will be critical supports as firms shore up their resiliency for the challenges ahead. Here’s what’s ahead:

 

SLOWED SPENDING AMONG PRESSURES ON PROFITABILITY

Nationally, new construction spending is expected to reach $2.145 trillion in 2025, hitting $2.340 trillion by 2028. But after surpassing 7% in 2024, growth is likely to slow to 2% in the new year as challenges intensify. Expect a difficult lending market, weakening commercial property values and soft architecture firm billings, along with potential policy changes by a new administration amidst an unremitting labor shortage.

Even so, Dodge Data & Analytics expects an 11% increase in the total value of new contracts in the Seattle region. Starts are expected to reach $17.4 billion. But the state’s revenue shortfall through the next two budgets could hit $15 billion. One solution, a bidding freeze on new transportation projects, will impact infrastructure construction work in 2025.

On the residential side, proposed changes to Seattle’s comprehensive plan for housing construction hold promise for needed diversification of future stock. For example, more medium density housing (replacing single-family units) would be encouraged in walkable neighborhoods through loosened regulations. Other causes of concern: Material costs have largely stabilized, but the labor shortage remains a major headache. The state’s supply of construction workers declined 2% in in the first six months of 2024 from 2023 levels.

Then there’s the systemic shock of some $2 trillion in commercial real estate debt maturing in the midst of high vacancy rates (now about 35% in downtown Seattle). Case in point: The default by prominent Seattle office developer Martin Selig on a $240 million loan secured by two of his highest-profile projects, with more defaults expected. The inability of many to refinance may well cause a broader lending pullback, with the fallout affecting the construction industry.

 

PERSISTENT LABOR SHORTAGE DRAINS VITALITY

The shortage of construction professionals is not improving.

The industry is tracking news from Washington about the new administration’s immigration policies and promised deportations. Already, it can expect a deficit of 450,000 workers in 2025. Mass deportations would cause problems. Construction’s share of non-U.S. citizen workers is the highest of any other sector at 2.45 million out of 11.38 million employees. About 21,000, or 14% of the state’s construction workers are unauthorized.

Everyone’s looking for solutions. Construction trades account for more apprentices than any other sector thanks to a 40% growth in registered apprenticeship programs over the last decade. The expanding adoption of technology fills the gap and helps “rebrand” the job. High-tech tools like drones and robots require new skills to operate, and they take on some of the most dangerous tasks. Wearable tech also makes the job safer, with devices that detect body heat and fatigue or use GPS to detect falls or lack of movement.

Rethinking benefits also can help. Personalized benefits are an increasingly powerful way to craft an optimal employee experience. Taking a deep dive into employee data helps uncover what people value in order to deliver benefits that individuals truly want and need, creating an environment of engagement and productivity that improves recruitment and retention.

 

RESILIENCY TESTS AHEAD

In addition to economic conditions challenging Washington’s construction industry, weather extremes are worsening. Guarding workers and businesses from the worst effects is a priority.

From a bomb cyclone that opened the floodgates to an atmospheric river of moisture to triple digit temperatures that spiked heat-related illnesses, aggravated air quality and sparked more wildfires, Washington continued to experience the effects of climate change in 2024.

Its construction firms paid as weather extremes wreaked havoc on project timelines and put workers at risk. Extreme heat is a leading cause of death for any workers laboring outside. When work schedules must be adjusted for weather conditions, the physical work can stretch out by 35%.

Especially when combined with economic issues, such conditions require firms to focus in on risk management, especially since insurance costs and availability at required limits can be pressured.

A comprehensive claims management plan is essential for managing through any type of business disruption. An effective loss mitigation strategy also can reduce claim severity by leveraging coverages like Extra Expense to reduce downtime and minimize losses. A first-class broker is critical for putting such strategies in place.

Weather extremes also make parametric insurance Important. This pays policyholders when weather thresholds pass a pre-specified mark. It’s an option over traditional lines that don’t cover losses stemming from, for example, heat waves.

Above all, construction firms must be poised to effectively manage changing business dynamics. It makes a strengthened risk management strategy, supported by an insurance program adjusted for today’s conditions, an imperative.

Brandon Baucom, MBA, ERIS, is vice president of commercial lines for global insurance brokerage Hub International. His expertise lies in construction and builder’s risk, and he works out of HUB’s Washington office.

 

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