Commercial construction faced national challenges last year including impacts of tariffs on material costs, labor shortages and job declines, delays in supply chains and overall market hesitation stemming from these issues as well as high interest rates and uncertainty as to how the market will correct. However, some markets faced unique challenges, and others advantages.
Nationally, commercial construction decreased by 8.2%, per the U.S. Census Bureau, by the middle of 2025. This was due to several factors, including continued inflation, high interest rates, uncertainty regarding tariffs, material cost increases and labor shortages. Specifically, tariffs caused material prices to steadily rise throughout 2025, especially for products like steel, aluminum and lumber.
To that end, developers, contractors and lenders have had to adjust to the new normal. Budgets for large commercial projects must be reevaluated in the new market. Typically, budgets have had to be increased and timelines for completion adjusted to accommodate for the increased costs of materials and potential delays in procuring materials and labor.
On the development side, developers have had to adjust risk management differently than they have in the past. Given the increasing risk, developers have been hesitant to engage in speculative starts on commercial projects, instead focusing on pre-leased or funded projects. This has led to developers being much more cautious and selective in the type of projects undertaken, focusing somewhat on niche growth areas like data centers and logistics hubs.
A related issue that developers must deal with comes from the lending side. Given the new risks involved in development, lenders are often requiring larger equity contributions from potential developers, because the cost volatility and scheduling risks create additional risk for lenders financing large commercial projects. Additionally, lenders are typically using higher contingency assumptions and requiring longer lease-up and stabilization periods. The markets have also seen longer financing timelines, because lenders required final pricing, early procurement plans and, in many cases, availability of long lead-time items. Scheduling has also proved a more vital part of the early financing of a project, and insurance and bond requirements for the project are more scrutinized, again due to the increased risk in the market. Finally, the fact that interest rates are still very high, compared to where they were as recently as two to three years ago, creates additional stress on developers attempting to obtain financing, particularly given the escalating material costs and labor shortages.
The response from developers has been to attempt to push some of this risk downstream, with limited success. Fixed-price contracts are not as common, and the fixed-price contracts that are executed now often have escalation clauses, shared-risk provisions and allowances for volatile materials. Typically, these contracts have been revised because contractors are not willing to engage in all of the risk of material price increases and labor shortages. Additionally, both sides of most agreements related to commercial construction projects want the risk well-documented, again to eliminate any ambiguity given the uncertainty in the marketplace.
MANAGING COMMERCIAL CONSTRUCTION RISK
So, what have developers done to mitigate and manage risk given the pushback from contractors in the agreements? One approach is that developers attempt to lock in the final design earlier in the process. This allows more time to set the schedule and create longer lead times. Another approach has been to procure materials with longer lead times much earlier in the construction process than would be typical. Ideally, developers and contractors would prefer to wait to order materials until there is certainty as to what would actually be required for the project. But with the uncertainty of material costs, developers have had to adjust and order materials much earlier than they likely would have in prior years.
In addition to the other contractual adjustments noted above, developers have also attempted to contractually memorialize escalation risk in their construction agreements. Developers also try to build in larger interest and contingency reserves and, in many cases, have attempted to utilize multiple capital sources to mitigate risk associated with relying exclusively on a single lender.
On a national level, one of the obvious byproducts of these issues has been delay. Prior to the projects even starting, developers have exercised great caution before even beginning a new commercial project. However, once projects have started, delay has crept into those projects almost from the start. As noted earlier, lenders are more skeptical and require more concrete information along with increased equity, all of which tends to lengthen the amount of time required to get the financing in place to start the projects. Then, once the projects are funded and underway, the increased costs along with labor and material shortages can cause additional delays.
Once delays enter the equation on commercial projects, the specter of litigation enters the picture. Potential for litigation related to delay adds another layer of caution for developers, as does the threat of litigation related to cost overruns and labor shortages. If developers have not properly accounted for the risks in their financing, contract documents and bidding, material cost increases and lack of manpower to complete the labor can quickly derail commercial projects and lead to prolonged litigation. The idea of spending hundreds of thousands of dollars over the course of several years due to the market uncertainties that have been created provides a substantial deterrent to new commercial development.
UNIQUE MARKETS. UNIQUE PROJECTS.
In Las Vegas, commercial construction faced the same challenges but also had to deal with several different issues. As a market reliant upon tourism, Las Vegas has faced a decline in tourism, which—coupled with the factors noted above—has led to caution with respect to starting new commercial projects.
Additionally, construction jobs in Nevada overall fell 6.4% in 2025, approximately 7,100 jobs, creating additional labor stress for commercial projects. Nevada also has unique legal requirements that add a layer to risk assessment. Developers can only hold back 5% of the contract price as retention. Given that requirement, developers are not able to hold back as much money as they might like to protect themselves from material cost overruns and labor shortages (along with corresponding overtime charged by contractors to stay on schedule with a lighter workforce).
Nevada courts have long held that contract provisions assessing liquidated damages for project delays have to be “reasonable,” following that statutory requirement that in a contract, “Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm cause by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.” However, given the changing landscape of the market and the risk factors aforementioned, it is extremely difficult to ascertain what the courts are going to deem “reasonable” moving forward, which also makes it extremely difficult to mitigate risk in construction agreements using liquidated damages for delay.
THE UPSIDE OF COMMERCIAL CONSTRUCTION RISK
The Las Vegas market does have some built-in advantages, though, that have somewhat insulated this market from other parts of the country dealing with many of these issues. As noted earlier, lenders and developers assess risk partially based upon speculation. Projects tied to industries like hospitality, entertainment or publicly backed developments carry less risk for both lenders and developers. Fortunately for Las Vegas, many of the larger commercial projects in the pipeline fit those descriptions.
Las Vegas currently has several projects in development that fall into those categories. One is the new baseball stadium for the Athletics, being built on the site of the old Tropicana Hotel. Given that the state is paying for a significant portion of this project, the stadium fits into all three categories. Las Vegas is also in the process of building a major museum (and corresponding commercial developments around the museum), another project that checks all three boxes. Development of the new Hard Rock Hotel and Casino, on the site of the former Mirage Hotel and Casino, is also underway. And in late 2025, a new retail plaza in Las Vegas’ Chinatown area was announced, set to break ground this year.
While the commercial construction economy as a whole is struggling with uncertainty due to the risks associated with cost increases, material and labor shortages, and corresponding apprehension, the aforementioned projects have kept Las Vegas commercial construction moving forward. Given that hospitality and entertainment are staples of the Las Vegas economy, the hope would be that commercial construction in this market will continue to thrive despite the risks and uncertainties that commercial construction projects throughout the country face.
SEE ALSO: NONRESIDENTIAL CONSTRUCTION SPENDING REMAINED STAGNANT IN OCTOBER
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