Developers have been confronting several challenges in terms of supply, demand, and costs that are making it more difficult to break ground on new projects. Yet the total dollar value of overall construction starts is expected to grow 4 percent, to $1.26 trillion, in 2026, according to Dodge Construction Network. A big driver for activity comes from the booming data center sector, which is forecast to increase 7 percent, to $195 billion, in the coming year.
Urban Land: Overall, there appear to be numerous crosscurrents affecting development activity in terms of supply, demand, and costs. What is your outlook for how commercial real estate construction costs are likely to trend in the coming year? Additionally, where do developers need to brace for higher costs—and where might they see some relief in pricing declines?
Kenneth D. Simonson, chief economist, The Associated General Contractors of America
Contractors have more subdued expectations for growth in 2026 than they did a year ago, apart from data centers and power projects. With slow or declining growth for most structure types, there will be little demand pressure on materials costs. However, materials that are imported or compete with imports will experience outsized cost increases. The major cost concerns for contractors center on availability, quality, and wage rates for craft workers. Aggressive deportations and immigration enforcement will hit construction much harder than they will most industries.
Brian Bailey, senior managing director, head of research, Trimont
Trimont’s outlook for national construction costs in 2026 is generally flat. According to the Bureau of Economic Analysis, gross private domestic investment in nonresidential structures has declined in every quarter since Q1 2024. Since then, investment in residential structures has declined in five of the last seven quarters.
From my point of view, this suggests a continuing downward trend in new construction activity across both commercial and residential real estate, which matches anecdotal evidence we are hearing from our clients in the multifamily and warehouse sectors. Overall, a declining trend signals less pressure on costs.
National construction costs increased 2.8 percent, versus one year earlier, in January 2026. When adjusted for inflation, construction costs have remained largely flat. Cost pressure varied substantially by major market—a handful of markets enjoyed outright cost decline, while Chicago construction costs were pushing near double-digits (Chicago pricing appears driven more by labor costs than by physical costs).
Christopher Thornberg, PhD, founding partner, Beacon Economics
When inflation kicked in, back in 2022, material costs for construction rose far more than consumer prices did—and have not fallen since. Costs remain higher, on aggregate, which is one of the reasons for the housing affordability squeeze being experienced in the United States. However, despite tariffs, material costs have been more or less flat over the course of the last year. This, combined with an economy that continues to be healthier than . . . headlines suggest, should mean better margins for builders in the year ahead.
What the market should be worried about, more than the cost of inputs, is the cost of capital. The biggest issue we’re facing as a nation right now has to do with the interaction between the federal deficit and the stock market bubble. The reason the federal deficit hasn’t caused the 10-year treasury rate to move higher is, in part, because of the tremendous amount of foreign capital flowing into the United States. Capital is chasing the outsized returns being earned in our equity markets, compared to the rest of the world. Over the last year, well over a trillion dollars net in portfolio investment—known as “hot money” by economists for its ability to quickly flee back to where it came from—has poured into the United States.
The current scenario is very much like what we saw in the run-up to the Great Financial Crisis. Back then, money was pouring in to grab asset-backed securities tied to residential housing markets and paying for our excess consumption. Now, capital is pouring in to buy AI-backed equities and is paying for our massive public deficit. The problem here is that the flow of money will leave when people realize that returns are going to diminish—a reality, as asset prices can only go so high. When that money starts backing off, we suddenly have to self-fund our deficit, and that means higher interest rates yet again. In a market still working through the last rate shock with extend-and-pretend financing efforts, this hit would sharply impact valuations and cause a sharp decline in demand for new development.
Nadia Evangelou, principal economist and director of real estate research, National Association of REALTORS®
Construction costs will keep rising this year, but at a slower pace than in recent years. This may vary by sector and region, but materials inflation has cooled, especially from the peaks in 2021 and 2022. Supply chains have also largely normalized, providing some relief for items like lumber and steel. Then, in markets with slower project activity, this may bring more stable pricing and improved contractor availability.
Labor, however, remains the key pressure point. Skilled labor shortages persist, and wage growth continues to push overall cost higher, particularly for projects requiring specialized skills. Overall, while construction costs are unlikely to fall, the pace of increases should slow, with labor shortages remaining the main factor of the upward pressure.
Chad Littell, national director, U.S. Capital Markets Analytics, CoStar Group
Commercial real estate construction costs in 2026 will be shaped by several crosscurrents influencing prices. On the supply side, the development pipeline is clearly resetting. Data points to meaningful declines in new deliveries after 2025, most notably in industrial and multifamily. This pullback is already showing up anecdotally, with contractors reaching out to developers to secure upcoming work to keep their crews busy. That behavior is typical of a market moving into a softer phase for construction starts and gives developers slightly more leverage than in years past.
However, material costs remain a source of upward pressure. Broad commodity benchmarks, as measured by the Commodity Research Bureau’s CRB Index, are up roughly 2.4 percent over the past year and point to typical cost increases ahead. But certain inputs are increasing more sharply. Copper, for example, is up about 36 percent year over year, potentially putting added pressure on electrical and mechanical trades.
Labor may be the most structurally constrained. Across market conversations, contractors cite persistent shortages at the skilled end of the labor pool, driven by long-term underinvestment in the trades and accelerating retirements. High-tech manufacturing and data center development are intensifying this competition, requiring higher wages to recruit and retain experienced workers. Lesser-skilled labor appears more available for now, but wage pressure is expected to move down the ladder as contractors aim to keep crews intact.
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