Stubborn inflation prompted the Federal Reserve this past Wednesday to raise interest rates for the first time in more than three years, adding another potential financing hurdle for developers and contractors already contending with rising construction costs and tight lending conditions.
The central bank voted 12-0 to raise the target range for the federal funds rate by a quarter percentage point to 3.75%-4%, with another increase expected later this year. For the construction industry, the increase could make financing more expensive and further complicate the viability of planned projects.
“Mortgage-rate pressure may weigh on housing demand, while higher borrowing costs can make it more expensive to finance land acquisition, equipment purchases and construction loans,” writes Michael Guckes, ConstructionConnect’s chief economist. “Commercial projects may also face additional scrutiny as owners and lenders reassess expected returns, capitalization rates and debt-service obligations. Contractors could see downstream effects if developers delay starts, reduce project scope or take longer to secure financing.”
Financing Pressures
Economic uncertainty emerged as contractors’ top concern heading into 2026, according to the Associated General Contractors of America’s (AGC) annual construction outlook. AGC noted that construction contractors have “dampened” expectations for 2026, aside from growing demand for data centers. In the analysis, 63% of contractors said an owner had postponed or canceled a project during the previous six months. Thirty-four percent said project financing was unavailable or too expensive, while 37% cited lack of funding or uncertainty about a funding source.
The responses came as borrowing conditions actually eased from 2025 into most of 2026. The effective federal funds rate went from an average of roughly 4.21% in 2025 to about 3.64% through August 2026; though, it should be noted that developers and contractors borrow at rates tied to the Secured Overnight Financing Rate, prime, Treasury yields and lender-specific spreads. Those borrowing rates can be higher than the Federal Reserve’s policy rate.
Costs Keep Climbing
Producer Price Index data on new nonresidential construction shows that costs rose 8.9% between August 2025 and August 2026 amid conflicts in the Middle East and steep tariffs on key materials. Due to those higher costs, AGC’s analysis and member survey released in September 2026 found that 55% of respondents had projects canceled, postponed or scaled back during the previous six months.
“As firms pay more to address labor shortages and materials prices continue to climb, they are caught between pricing themselves out of the market or performing work at a loss,” says Jeffrey D. Shoaf, AGC’s chief executive officer. “Rising materials prices and a lack of real federal commitment to construction workforce development are acting as a brake on economic activity that could, if left unaddressed, have significant consequences for the broader economy.”
A Mixed Picture
The Federal Reserve’s August Beige Book paints a mixed picture for construction. Nationally, residential construction declined while nonresidential construction increased, with some districts reporting that activity remained concentrated in data center projects. Construction firms across multiple districts also reported elevated input costs, particularly for energy, transportation, metals and other raw materials.
Conditions varied by region, but three themes stood out nationwide: higher financing and development costs are suppressing projects, data centers are masking weakness in broader nonresidential construction and materials, and operating costs remain a pressure point. The Federal Reserve’s Seventh District, which includes Chicago and much of the Midwest, notes that “as one contact put it, ‘without data centers, construction would be in a recession.’”