2027: Recovery in construction that keeps being deferred
The global construction sector is still expected to return to growth in advanced economies by late 2026 and in 2027. That said, the recovery is proving to be more elusive and gradual than previously anticipated. The optimism that emerged at the start of 2026 across major markets in Europe and North America has faded following renewed tensions in the Middle East. The resulting rise in long-term interest rates has tightened financing conditions, weighing on both housing demand and commercial real estate investment.
The conflict has also affected the sector through the cost channel. Disruptions to global supply chains have refuelled upward pressure on construction input prices, affecting both highly energy-intensive materials, such as cement, glass and bitumen, and products more directly exposed to disruptions in Gulf trade routes, including aluminium and a wide range of petrochemical derivatives used in insulation, paints and PVC products. The combination of higher financing costs and renewed cost pressures has further eroded confidence across the industry.
This has continuously delayed the recovery in construction activity as a result. Residential and commercial building continue to be constrained by tight credit conditions, elevated uncertainty and subdued investor appetite. Infrastructure, public works and civil engineering, however, continue to provide a crucial source of resilience. Investment in these segments is supported by four powerful structural drivers that are reshaping construction demand worldwide: decarbonisation, particularly in Europe, digitalisation, especially in the US, economic decoupling and the pursuit of greater industrial sovereignty across major economies, and rising defense expenditure. Together, these forces are sustaining project pipelines even as the traditional cyclical engines of construction continue to come under strain.
Housing remains the sector's weakest link
Housing, the most cyclical component of the construction industry, continues to stabilise globally, but at a slower-than-expected pace. Mortgage rates remain high across the European Union on back of inflation concerns sparked by geopolitical tensions. The gradual recovery in mortgage lending observed earlier in the cycle has lost momentum, delaying improvements in building permits, housing starts and, ultimately, construction turnover.
The challenges are particularly acute in large markets such as France and Germany, where residential construction remains subdued and financial distress among property developers continues to weigh on activity. The transmission mechanism is straightforward: pinched household affordability reduces demand, which, in turn, discourages new project launches and delays recovery in the broader sector. That said, the European picture is far from uniform. Some markets continue to display noteworthy resilience, particularly the Netherlands and Spain, where persistent housing shortages continue to underpin both demand and construction activity.
In North America, residential construction continues to lose momentum. Both the US and Canada are experiencing weaker activity in new housing, reflected in softer permit grants and housing starts, and materialised by declining prices in the new-build segment. The outlook remains uncertain on both sides of the border. In the US, slightly lower mortgage rates have helped sellers to return to the existing home market, thereby improving supply conditions and reducing the relative attractiveness of newly built properties. At the same time, inventories of completed but unsold homes have been rising, placing increasing pressure on developers and weighing on future project pipelines. Canada faces similar challenges. Developers are contending with weakening demand, growing inventories and softer selling prices. These pressures continue to be compounded by structural constraints, including persistent shortages of skilled labour and persistently elevated construction costs, which is limiting the sector's ability to regain momentum.
Residential construction remains fragile across much of Asia-Pacific, though the underlying drivers vary considerably from one market to another. China continues to grapple with the legacy of excess housing supply, with little evidence of a sustained turnaround. In Japan and South Korea, adverse demographic trends continue to damp growth at national level, even though trends in major metropolitan areas such as Tokyo and Seoul are comparatively robust. Elsewhere, urbanisation consistently provides a powerful tailwind. Demand for housing and infrastructure in India is supported by rapid population growth and ongoing urban expansion. Australia also bucks the trends, with residential activity recovering relatively quickly despite rising interest rates. Strong migration flows and a chronic shortage of housing continue to provide substantial support to construction demand.
The Gulf region presents a more mixed picture. Construction activity remains robust in Saudi Arabia and is bolstered by a large growing population and a substantial investment pipeline. However, in the United Arab Emirates (UAE), the outlook has become more uncertain. The UAE's property market relies heavily on foreign capital and international buyers, making it particularly sensitive to shifts in geopolitical sentiment. Recent uncertainty has prompted some investors to adopt a wait-and-see approach, which has contributed to softer transaction volumes and eroded market confidence. This has begun to trickle down into weaker price dynamics, particularly for off-plan property projects. Developers carrying significant inventories of unsold properties are especially exposed. While the structural long-term appeal of Dubai and Abu Dhabi remains intact, the short-term outlook will depend heavily on geopolitical developments.
Infrastructure and public works are an ongoing pillar of stability
Civil engineering continues to be the most resilient segment of the global construction sector. In Europe, the segment grew by 3% in the first half of 2026 and is expected to remain a key driver of growth throughout 2027. Activity has been supported by a combination of public investment programmes and long-term infrastructure needs. Germany's renewed infrastructure ambitions, together with continued deployment of European funds in Central and Eastern Europe, Italy and Spain, should sustain project pipelines over the coming quarters.
The outlook, however, is not without its limitations. The gradual return of fiscal discipline across several European economies is likely to damp the scope for new public investment commitments and local projects, while political cycles may create additional uncertainty. In France, for example, the recent 2026 municipal elections weighed on the sector’s turnover in the first semester, while the 2027 presidential election could add a layer of uncertainty for larger infrastructure projects. Despite these headwinds, the sector remains in a relatively healthy position across the continent. Labour shortages and rising construction material costs continue to pose the main operational challenges, but profitability has generally held up and insolvencies have been limited compared with other construction segments.
In the US, the non-residential segment has lost some momentum after a period of exceptional expansion. Activity has broadly stabilised following the strong growth recorded in 2023 and 2024. At the same time, investment patterns within non-residential construction are shifting. The rise in industrial capacity that accompanied the first wave of investment in strategic sectors (e.g., following the CHIPS Act) has moderated, while investment in data centres has accelerated dramatically over the last few quarters, acting as the next growth driver for the sector. This reallocation of capital is expected to continue as demand for computing capacity, artificial intelligence applications and digital infrastructure remains strong. An extensive project pipeline suggests that data-centre construction will continue to be one of the fastest-growing areas of US construction over the medium term.
Infrastructure needs across Asia are an enduring and powerful structural linchpin for the sector. In emerging economies, ongoing urbanisation, industrial development and demographic growth sustain significant demand for transport, energy and utility infrastructure. India remains one of the most dynamic markets in this respect, while government-led investment continues to shore up activity in China despite broader weaknesses in the property sector.
The outlook is equally robust across the Gulf. Large-scale government development programmes continue to drive construction activity as countries seek to diversify their economies beyond hydrocarbons. Saudi Arabia's Vision 2030 and the United Arab Emirates' long-term strategic plans are sustaining widespread investment across transport, energy, industry, tourism, digital infrastructure and urban development. As a result, civil engineering and public works are expected to remain among the region's strongest-performing construction segments throughout 2027.
Commercial real estate: fragile recovery amid persistent office overcapacity
Commercial real estate continued to recover throughout 2026 on back of a gradual return of investment activity. However, the recent rise in long-term interest-rate uncertainty amid the closure of the Strait of Hormuz is undermining this momentum.
The office segment continues to be the sector's main weakness. Vacancy rates are high in most advanced economies as hybrid working patterns continue to weigh on demand. Nevertheless, signs of improvement are emerging, particularly in Europe, where both office construction and investments have returned to growth for the first time since the pandemic, although they are still very low by historic standards. That said, the recovery is highly selective. Investors and occupiers continue to favour prime assets in the best locations and with the best characteristics, reinforcing the flight-to-quality trend that has reshaped the sector since Covid-19. Older, less efficient buildings continue to grapple with declining demand and growing obsolescence risks. The trend in the US is more challenged on back of persistently weak demand, materialised by already high vacancy rates that are continuing to rise.
By contrast, retail and logistics real estate have proven more resilient. Demand from occupiers is relatively stable, supported by evolving consumer patterns and ongoing supply-chain needs.
Building materials: weak demand meets renewed supply pressures
The building materials sector continues to track construction activity. Across most advanced economies, including Europe and North America, and in China, production has remained broadly stagnant across major product categories, from cement and glass to metals, plastics and chemicals.
For energy-intensive materials such as cement and glass, higher energy costs have prompted producers to raise selling prices. However, weak downstream demand has curbed their ability to fully pass these increases on to customers. As a result, margins are coming under pressure as companies grapple with the dual challenge of subdued volumes and lacklustre pricing power.
The picture is more mixed in other segments. Aluminium and petrochemical-based products have also been affected by disruptions to Gulf trade flows, resulting in higher costs and increased uncertainty across parts of the supply chain. The extent to which these pressures translate into sustained price increases or shifts in market dynamics will depend on the duration of the disruptions and the ability of producers and buyers to adjust sourcing patterns.
Over and above these cyclical challenges, the industry continues to contend with an ongoing profound structural transformation. Building materials are among the largest industrial sources of carbon emissions, particularly for cement, steel and glass production. Consequently, decarbonisation has become a strategic imperative and is driving significant investments in cleaner technologies, alternative fuels and more efficient production processes. The gradual implementation of the EU's Carbon Border Adjustment Mechanism (CBAM) has reinforced this trend by increasing the carbon cost of imports and strengthening incentives to reduce emissions across domestic production chains. While these investments are essential to the sector's long-term competitiveness and to regulatory compliance, they also represent a large-scale financial burden, especially for smaller producers operating older and less efficient industrial assets.
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