As we approach 2025, the construction industry continues to evolve, presenting both challenges and opportunities for growth. This paper explores the key trends shaping the sector, including economic and political uncertainties, labor shortages, mental health awareness, commercial real estate stresses and the increasing role of artificial intelligence (AI). By understanding and addressing these trends, businesses can better position themselves for success in the coming year. At Gallagher, we're committed to providing the insights and resources needed to navigate these changes effectively.
Economic and political uncertainty
Over the past several years, there have been widespread predictions that the US economy would fall into recession. The recession has yet to occur. With a poor July jobs report, J.P. Morgan assesses a 45% chance that the economy will go into recession by the end of 2025.1
Geopolitical concerns could also affect the economy. War continues to rage in the Near East (Ukraine) and Middle East (Gaza and perhaps southern Lebanon) and feels possible in the Far East (along the first island chain). There's also increasing concern about the sustainability of the federal deficit, with interest payments on the debt alone now exceeding trillions of dollars per year.
Continued labor shortages
According to Grassi's comprehensive survey of 248 construction and architecture and engineering (A&E) leaders, the same survey respondents who expected their revenues to grow cited labor shortages and increased labor costs as the greatest threat to their businesses.2 An Associated General Contractors (AGC) survey found that 94% of firms were finding it difficult to find craft labor, while 92% were having difficulty filling salaried positions.3 As a result, some employers are taking a more holistic approach and working on career readiness skills.
Another approach to addressing labor shortages by using robotics. For example, a company developed a robotic dog that's proven effective in navigating sites where hazards restrict human access. Similarly, contractors are beginning to use robots for tasks such as hanging and finishing drywall, with human assistance required for activities like taping.
Mental health awareness
A disturbing issue has arisen in the form of employee suicides — more workers are lost to suicide than accidents.4 The magnitude of this disparity is sadly demonstrated by the fact that in 2018, Washington State lost only six workers to injury but 125 to suicide.4 Male construction workers face the highest risk, with a suicide rate that's 75% higher than that of the general population.5
AGC started its own suicide prevention effort, and New York recently launched a suicide prevention program for construction workers.6
In addition to having a devastating effect on the families and communities of construction workers who die by suicide, suicide in the construction industry has significant implications for insurance, as it directly impacts workers' compensation and employer liability. The high suicide rates among construction workers can lead to increased premiums and financial strain on insurance providers. More importantly, it underscores the need for comprehensive mental health support and wellness programs within the industry — which also can help mitigate risks and reduce the overall cost of insurance. Addressing mental health proactively not only supports the wellbeing of workers but also contributes to a more stable and sustainable insurance landscape for construction companies.
To address this issue, construction companies can take several steps, which include raising awareness and reducing stigma through regular training and open discussions, implementing mental health programs and fostering a supportive work environment with peer support programs. To guide your company on what to consider for a mental health program, consult Gallagher's Mental Health Key Performance Indicator Checklist.
Providing access to mental health resources, promoting work-life balance, monitoring workplace stressors and developing crisis intervention plans are also crucial. Engaging leadership, collaborating with external organizations, and regularly evaluating and improving programs further ensure a comprehensive approach to employee wellbeing and suicide prevention.
Commercial real estate
We continue to see stresses in the commercial real estate (CRE) sector. These stresses are mostly driven by office vacancies, which are powering an increase in adaptive reuse — converting office space to other uses, such as residential. Reports suggest that work from home and hybrid work have dramatically reduced office occupancy rates, with vacancy rates plummeting in cities such as Washington DC and San Francisco. This trend doesn't account for under-use, where tenants entered into longer term leases but aren't using their full space. Actual office occupancy appears to be at 50%.7 When leases on underused spaces expire, official vacancies will increase further.
There are some indications of recovery. Large companies are starting to mandate that employees return to the office full time in 2025. As white-collar employee shortages ease, employers are gaining greater power, and other companies may follow suit.
If post-pandemic trends of work from home and hybrid work continue, however, CRE issues arising from those trends could reduce insurer balance sheets and profitability, which could translate into longer-term impacts on rates and capacity. Insurance companies traditionally make their income from investing premium income before paying that premium out in claims. Because many insurers have CRE investments, decreased rents and CRE valuations could reduce insurers' return on assets and have longer-term impacts on insurer solvency.8
Artificial intelligence
Grassi's survey showed that over 50% of contractors intended to invest in better technology over the next year, including AI.2 In the construction industry, AI has been seen as a way to revolutionize project safety, planning and estimating, quality control, and design. Read more in our whitepaper, Artificial Intelligence and the Construction Industry.
Examples include analyzing videos taken from hardhat-mounted cameras or drones to track progress, identify safety violations and identify quality control issues.9 Some contractors are also finding that AI dramatically improves their accounting and accounts payable processes.10 For example, by using optical character recognition (OCR), AI can read paper invoices to match costs to jobs without manual input.
AI implementation
While AI holds significant promise, we're still in the early stages of its implementation. Organizations interested in AI should develop plans to identify and implement AI opportunities, starting with recognizing existing AI technologies and identifying areas where AI can add value.
Compliance and risk management are crucial, followed by implementation, which includes evaluation, iterative testing, employee training and continuous improvement. Quality control is essential to prevent AI "hallucination" — fabricated information — that can lead to inaccurate outputs and legal issues.11 Ultimately, architects and engineers remain responsible for their work, and industry groups are concerned about coverage for AI-induced errors and intellectual property (IP) infringement.
AI risk assessment
Because AI involves gathering and analyzing data using what we humans might call a "black box," some risks are associated with its use.
First, there's data privacy. As of July 24, 2024, at least 19 states passed data privacy laws, and bills have been introduced in numerous other states.12 Organizations with business in Europe may also find themselves subject to the European Union's General Data Protection Regulations (GDPR). These regulations may impact how you can use data and how you may present or use AI-generated information.
A related risk involves biometric data. Security systems may include the use of fingerprints, retinal scans or other unique biometric data. Several states have passed laws protecting that data.
The Illinois statute provides a good example. In its legislative findings, the Illinois legislature noted that biometrics are unlike other unique identifiers like social security numbers because they can't be changed. Accordingly, someone with access to your fingerprint can use it wherever your fingerprint is used as a marker.13 The Illinois law requires private entities to develop written policies establishing retention schedules for such information and making those policies available to the public. It requires deleting the data within certain timeframes and requires that parties possessing this data keep it confidential.
Architects must also consider whether AI can be considered a "derivative work" of data used to train the AI model. Generally speaking, when someone creates a design, they own a copyright in the design. If someone else uses that design to create their own work, the new design is considered a derivative work that can violate the original designer's copyright.14 Copyright violation can be a problem even if the AI is trained just on the architect's own designs, as many design contracts require the architect to transfer the copyright to their client as an assignment or work for hire. Non-disclosure agreements (NDAs) may also be violated if confidential data is included in the database from which AI is trained. Accordingly, all legal agreements should be reviewed with an eye towards eventual use of the data in AI applications.
Regulatory risks and benefits
Regulation continues to affect the industry in ways that can be considered good or bad, depending on your point of view. Regulations pushing for greener buildings and processes are creating more business for contractors.15 Likewise, the Inflation Reduction Act (IRA) requires contractors working IRA projects to pay prevailing wages — often increasing the contract price.
Conclusion
The market continues to evolve, presenting new risks and new opportunities. As we navigate these changes, it's crucial to stay informed and adaptable. At Gallagher, we're ready to provide you with the resources necessary to address those risks and seize those opportunities.
