Construction Sector: Data Centers Help Power Optimism Despite Uncertainty Over Economy

Construction insurance specialists cite a number of factors in describing the 2025 construction industry as a market in transition. There is uncertainty about the year’s economic outlook, potential impacts of tariffs on the supply chain for materials, project delays, and the ongoing and perhaps worsening issue of labor shortage. All of these forces are pressuring contractors of all sizes.

The effects are seen in the data. “Broad-based monthly declines in construction starts represent a troubling signal for the sector,” said Eric Gaus, chief economist at Dodge Construction Network. According to Dodge, total construction starts were down 9% in April to a seasonally adjusted annual rate of $1.03 trillion. Nonresidential building starts declined 3%, residential starts fell 4%, and nonbuilding (highway, bridge, utility/gas, and other public works) starts decreased 22%. On a year-to-date basis through April, Dodge reported total construction starts were down 3% from last year.

The Associated General Contractors of America reported that construction spending fell for the third month in a row in April, declining 0.4% from March and 0.5% from a year earlier–the first year-over-year decrease since April 2019. “Ever-changing announcements about tariffs on key construction inputs, along with potential retaliatory measures by U.S. trading partners, are making owners hesitant to commit to new projects,” said Ken Simonson, chief economist of AGC, in early June.

The rollercoaster environment surrounding U.S. trade policy and the economy’s short-term outlook in general have been the main drivers of uncertainty for construction industry outlook in the first half of 2025 and, likely, going forward as well.

“Unless contractors and investors have greater certainty about what costs and demand to expect, private construction is likely to continue declining,” said Jeffrey D. Shoaf, AGC’s CEO. “That will make the U.S. less competitive and damage the prospects for economic growth.”

While the data may not be encouraging, construction insurance specialists remain relatively positive. While they do have concerns about project delays, the good news is most delays have not yet turned into project cancellations.

Unless the delays turn into years and not months, the insurance industry will likely not feel the bump, said Kirk Chamberlain, executive vice president, leader of Hub International’s construction practice. “Delays in the process bum out the brokers a bit as they’re trying to place insurance and make money, but we haven’t seen a ton of delays turn into cancellations, which is good news for us,” said Chamberlain.

Darren Tasker, regional head of construction in the Americas for Allianz Commercial, added that while there is more uncertainty in the construction world now than in 2024, building has not stopped. “Still a ton of projects in the pipeline. Contractors still have a massive back order of contracts,” he said.

At the same time, Tasker acknowledged that “from an insurance binding perspective, construction business is a little bit slower.” Brokers may not be binding new business at the same speed and consistency as last year, but that trend could change at any moment, and there’s still plenty of opportunities in the construction insurance market, he maintained.

Chamberlain also sees opportunities ahead. He believes there is plenty of building happening now and even if the U.S. enters a recession, and some sectors of the construction industry slow even further, the bulk of the construction market will “power right through it.”

Robert DiBiase, executive vice president, national director, Alliant Construction Services, is another optimist. “There’s a significant amount of mega projects out there, whether it be airports, hospitals, infrastructure, large projects in the Northeast, and certainly out West,” he said. “We’ve seen pockets of slowdowns, but ultimately we feel pretty good about the remainder of the year.”

Data Centers

The data also identifies that one encouraging source of development in construction is new data center projects. Data center construction starts reached unprecedented levels in 2024, according to Dodge, with projects totaling over $9 billion last year.

“We do a lot of data centers, and that’s just exploded over the last 12 to 18 months,” Chamberlain said. The size and complexity of risk when building data centers have also exploded, he added. “The first generation of data centers were not particularly complicated from a design or construction perspective,” he said. That’s changed. “About a year and a half ago there was a noticeable shift … Two or three years ago, they were routinely $600-$700 million [to build]. Now, they’re routinely a couple of billion.”

Chamberlain said that the rise in project value has a lot to do with size and scale but also the addition of power. “You can’t build these things without power.” First-generation data centers were built in locations where they could “plug in” to power, such as in northern Virginia, for example. “Now we’re seeing them pop up everywhere, and because they’ve gotten so big they’re bringing their own power with them,” he said. “They’re building their own power plants.”

Brendan Sullivan, senior vice president, construction and infrastructure at NFP, noted that the insurance market for data center construction has matured over the past few years as the complexity of building and risks have grown. “It was kind of interesting when you started working on them. At first glance they’re like a big warehouse with a lot of air conditioning, but then you look into the risk and they are a very technical build,” he said. “That adds a level of complexity around insuring the building,” he said.

According to Sullivan, the coverage is not just for building the building but also for all the special aspects that go into that building. “Is it up to code for what they need? Are there going to be professional errors?”

Also, there’s a significant amount of high-value technology that goes into building a data center. “We’ve had clients who’ve had water damage. Water damage is bad for any type of building, but when you have computer equipment–sometimes $10 million to $50 million of computer equipment that could be damaged–you can have much higher impacts from claims,” Sullivan said. “We’ve had clients who’ve had water backflow into the server room–it’s $10 million of damage if they get six inches of water. So, it’s things like that that you have to think about and get coverage for.”

Sullivan agrees data centers are likely the fastest-growing area in the construction industry today. “It’s a huge growth area for us, and everybody, right now,” he said. “Almost every carrier that you talk to, you ask them what’s their highest growth area. And if they’re not focused on something like wood frame construction for multifamily, they’re going to tell you data centers,” he said. “It’s where we’re seeing a lot of new builds.”

Brian Cooper, U.S. national construction practice leader for Gallagher, said that data centers are being built worldwide, but building is on the fast-track in the U.S., where most of the new building is happening in more rural areas.

They’re built in areas where there may not be infrastructure like in high-traffic urban areas, he said. “But they still need sufficient sources of cooling water and electricity,” he said. “So, that is generating a lot of work other than just the building of the data center itself, but all the infrastructure needs of those data centers and manufacturing facilities, chip plants, battery manufacturing, etc.,” he said.

Dodge Construction Network data confirmed that data center construction is a bright spot, with spending on data centers growing by double-digit, year-over-year increases in each month since November 2021. In late May, data center construction spending was up 33% year-over-year as AI-driven demand for computing power remained strong.

Chamberlain sees broad interest and appetite from name brand, legacy insurance carriers in this space in some form. “Certainly, on the builder’s risk side,” he said. “These are really big deals with large premiums, even when they’re taking quarter-share participation in it, there’s still millions of dollars of premium at stake, so it’s worth it for the underwriters,” he said.

But amid all the growth, Chamberlain does have a few worries about where this is all headed. “I think the trajectory at which these things are growing, these individual [data center] campuses are genuinely threatening to outrun the ability of the property insurance market to support them,” he said, adding that the market may already be at capacity for some regions.

And the sheer size of the risks is an issue. “We’ve got a client that’s doing a $12 billion-plus campus in the Midwest. Fortunately, it’s not in a hurricane zone, but it’s in a convective storm zone and partly in a floodplain, he said. “The biggest concern we have from a CAT perspective is convective storms, and that’s because these are highly concentrated PMLs (probable maximum loss) values,” he said. “You could have multiple billions of dollars of value in a 20-acre site, easily. So, it’s very easy to see how an F3 or F4 tornado could tear through the middle of Iowa or Nebraska and just rip one of these things to shreds in a single storm.”

Infrastructure and More

Another bright spot for construction is infrastructure, according to DiBiase. “There’s still a lot of infrastructure work that’s out there, especially in the Northeast. In New York, there’s a significant amount of work that’s going on,” he said. “There’s a lot of projects that have been funded by the government that are in process, and most of those are on the public infrastructure side. We’re seeing growth all over the country … that’s certainly the brightest light that we can speak to right now.”

Sullivan agreed that infrastructure is likely to continue growing this year even though overall construction builds are slowing down. “Recently I heard that drawings from architects and engineers are down about 50% from the year before, which is a precursor you see when construction slows. But we’re still seeing a huge investment in infrastructure. Also, we’re seeing a lot of multifamily in areas like Austin.”

Despite economic uncertainty, Sullivan said many of NFP’s clients are still getting equity and capital partners to invest in key areas where population is expanding. “We’re seeing a lot more infrastructure on electricity being built and also roadwork. … We’re seeing a lot more solar, as well.”

Sullivan said contractors are tailoring their programs for the increased costs in materials. “You’re seeing that these guys are growing very quickly. It’s honestly taking a client who used to be a $600 or $700 million contractor, and now they’re more in the $5 billion, $6 billion, $7 billion range.

They’ve grown quickly through acquisition and through increased work and increased material costs.”

For Sullivan, it is an interesting time in the construction insurance market. “There’s so much information that’s available, there’s technology to mitigate and avoid risk, but at the same time, there’s so much political uncertainty in other areas,” he said. That makes it hard to control some risks. “So, you just have to react the best way you can and jump in and help your clients evolve.”

Cooper said, generally speaking, uncertainty equals risk. “And there’s just a lot of uncertainty on a lot of levels,” he said. “If you have an opinion about something today, in a week from now, it’s probably going to be different.” That makes for a very dynamic and fast-moving construction market that adds risk to almost every facet of the business of construction, he added.

Opportunity in Uncertainty

Alliant’s DiBiase sees a blue sky ahead even though contractors see a little gray. “I certainly agree that there’s pockets of gray out there, but at the end of the day, we don’t see a significant slowdown,” he said. “We see, for lack of a better word, hesitation.”

The Associated Builders and Contractors reported in mid-May that nearly 22% of contractors had a project delayed or canceled in April due to tariffs, up from 18% in March, while 87% of contractors were notified of tariff-related material prices increases.

Despite these headwinds, contractors remain busy. ABC Chief Economist Anirban Basu said that backlog for construction projects rose in April and is now at the highest level since September 2023. Backlog has increased significantly over the past year for contractors with greater than $100 million in annual revenues, but backlog work has risen only modestly for the smallest contractors, ABC reported.

“There’s opportunities out there,” DiBiase said. “There may be people taking a deep breath and saying, ‘OK, I may want to slow down the project a little bit.’ An owner who’s looking at a building, whether it be in Florida or Texas or wherever, and the interest rate environment causes uncertainty,” he said. “I think the gloom-and-doom people really are looking at it differently than we are because we’ve been through these pockets,” he said. “When I look back to 2008, 2009 where we saw a significant dip … There was a pretty worrisome outlook for a lot of people,” he said.

“Don’t get me wrong, there was a dip, but there also was a significant bounce back rather quickly over the course of 12 to 18 months,” he said.

“I think the economists look at this a little differently,” DiBiase said. “They may be taking a longer-term view versus what I look at in the next 18 months. I think when we come back in 18 months and talk about this, it’ll be a little blip on the radar versus a significant downturn.”

Topics Construction