North American Construction Industry Faces Tariffs, Labor Strains

The North American construction industry is navigating a complex landscape of trade tariffs, migration controls, elevated borrowing costs, and economic uncertainty. While these challenges create headwinds, the United States is emerging as a relative winner, as reshoring efforts drive demand for energy and transport infrastructure investments.

According to multinational banking and financial services company ING, at the beginning of 2024, the North American construction industry showed resilience despite high interest rates, tight credit conditions, and political uncertainties tied to presidential elections in the United States and Mexico. However, 2025 presents new challenges, particularly with potential trade tariffs that could increase the cost of imported building supplies, US immigration policies that may constrain labor supply, and persistently high borrowing costs.

US Housing Market: Affordability Issues and Limited Supply

The US housing sector remains in an unusual position. Housing affordability has worsened, with home prices rising 52% since December 2019 and mortgage rates climbing back to 7%. Despite this, a lack of existing homes for sale has supported demand for new housing, keeping homebuilder sentiment stable.

However, multiple factors threaten this equilibrium:

• Rising borrowing costs: Although the Federal Reserve has cut policy rates by 100 basis points since September 2024, longer-term mortgage rates have risen by 90 basis points.

• Fiscal concerns: The US government’s fiscal deficit stands at 7% of GDP, potentially pushing the 10-year Treasury yield to 5% and keeping mortgage rates elevated.

• Labor shortages: Stringent immigration controls could further constrain construction labor availability, increasing costs.

• Trade tariffs: Proposed 25% tariffs on Canadian imports, along with new steel and aluminum tariffs, threaten to increase material costs.

These pressures could create a "perfect storm" for US homebuilders, with housing starts expected to decline from 1.36 million in 2024 to 1.28 million in 2025, stabilizing at similar levels before rebounding slightly to 1.35 million in 2027.

Meanwhile, the US non-residential construction sector is benefiting from federal incentives, such as the CHIPS Act, which has spurred semiconductor plant construction. The growth of data centers, fueled by artificial AI advances, is also accelerating construction activity.

However, the sector faces challenges including a strained power grid, as AI-driven electricity demand is increasing pressure on an already stretched grid. Other challenges include regulatory hurdles and trade policies, as tariffs may increase demand for domestic manufacturing facilities that require additional investment in power, water, and transportation infrastructure.

Despite these obstacles, lending conditions are improving, and corporate preferences for in-office work are supporting commercial real estate. US non-residential construction is expected to outperform other segments in the coming years.

Canada: A Vulnerable Economy Facing Trade War Risks

Canada’s economy remains under pressure following high interest rates in 2024, with unemployment rising to 6.9%. The Canadian housing market faces additional risks due to the prevalence of five-year mortgage terms, exposing homeowners to periodic interest rate resets. Household debt levels — 180% of disposable income compared to 100% in the United States — make the sector more vulnerable to financial stress.

Population growth through immigration has driven demand, but new policies may slightly curtail immigration levels through 2026. Trade tensions with the United States pose a significant threat, as 76% of Canada’s exports go to its southern neighbor. Proposed tariffs on Canadian goods could trigger economic downturns and a decline in construction activity, particularly in the non-residential sector.

Housing starts are projected to fall from 245,000 in 2024 to 225,000 in both 2025 and 2026, before rebounding to 250,000 in 2027, assuming trade disputes ease and interest rates decline.

Mexico’s Residential Market Gains from Remittances, But Non-Residential Construction Declines

Unlike its northern neighbors, Mexico’s residential market is relatively insulated from interest rate fluctuations. With only 20% of homes financed through conventional mortgages — compared to 70% in the United States — housing demand is more closely tied to job market conditions and remittance inflows.

Remittances from the United States reached US$63 billion in 2024, and the Mexican peso’s 25% depreciation against the dollar has amplified their purchasing power. This has boosted housing demand, particularly in regions popular with foreign buyers. However, Trump’s immigration policies could slightly accelerate Mexico’s population growth, adding further pressure to the housing market.

On the non-residential front, Mexico faces significant challenges. President Sheinbaum’s government is implementing fiscal consolidation, cutting infrastructure investment to reduce the fiscal deficit from 6% to 3.5% of GDP. Meanwhile, Trump’s push for reshoring is likely to curb manufacturing investment in Mexico. As a result, non-residential construction is expected to contract sharply in 2025 and beyond.