Commercial real estate construction is facing increasingly blustery headwinds, as lagging construction starts, climbing material prices and the conflict in Iran weigh on the development pipeline.

Tariffs have driven up material prices, and construction starts are down in nearly every asset class. The U.S. military action in Iran threatens to further exacerbate input pricing, borrowing costs and uncertainty.

Associated Builders and Contractors' Construction Backlog Indicator — a measure of construction companies' workload — clocked in at eight months in January, the lowest level in four years. The indicator ticked up slightly to 8.1 months in February, but the Northeast, South and West regions all have lower backlogs than one year ago.

“Backlog bounced back from January’s four-year low, yet it remains subdued by historical standards,” ABC Chief Economist Anirban Basu said in a statement. “It’s notable that backlog growth has been confined to the Middle States region.”

Sidebar:  ABC defines the "Middle States" as a slightly broader Midwest, including Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

Backlog in the region spiked in February, up a full month to 8.1 months from 7.1 months in January. The middle of the country has parlayed strong population and economic growth over the past year into higher construction activity, Basu said.

More broadly, overall construction activity in January was down in much of the country. Nonresidential building starts dropped by 15.4%, and residential starts fell by 6.4%, according to Dodge Construction Network.

Nonbuilding construction drove growth in construction starts in January, which were up 0.7%, Dodge Construction Network Chief Economist Eric Gaus said in a statement. That growth figure is buoyed by sizable developments in the nonbuilding sector.

“Three mega projects in the nonbuilding sector accounted for nearly $20B or almost half of the growth in January, which would mean total construction would have been negative without those three projects,” Gaus said.

Contractors working on data centers have a longer backlog than those who aren't, a difference of 11.2 months to 7.6 months, Basu said.

Nonresidential construction material prices spiked at a 7.1% annualized rate in January, driven by price increases in materials such as copper wire and iron and steel, which are affected by sector-specific tariffs. Basu said in February that aggregate price escalation wasn't particularly concerning, contingent on stable energy prices.

While contractors remain slightly optimistic about expanding profit margins over the next six months, Basu later said in March that confidence may not weather the recent spike in oil prices following the start of the military conflict between the U.S. and Iran. Rising material costs could also drag down hiring expectations.

“While data center work should continue apace over the next few quarters, the conflict in Iran, which began during [the] middle of this month’s CBI survey period, may suppress demand for other forms of construction work due to elevated materials prices, borrowing costs and uncertainty,” Basu said.