February Economist Snapshot: 2025 Outlook for Construction Costs

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Construction cost inflation continued to moderate in 2024. According to the global construction consulting firm Rider Levett Bucknall, cost inflation for North America increased 1.11 percent in the fourth quarter and rose 4.69 percent on a year-over-year basis. However, the Trump administration’s push for higher tariffs is reigniting concerns around higher costs ahead for real estate developers.

Urban Land Online: What’s your outlook for commercial/multifamily construction costs in the coming year, and how are costs likely to affect development activity?

Beth Mattson-Teig

Beth Mattson-Teig

Gleb Nechayev, head of research and chief economist, Berkshire Residential Investments

Rachel Tine

The baseline scenario is that new tariff policies will push U.S. construction costs higher this year, given that a tangible portion of materials—including lumber, cement, and steel—are imported. Net inputs to multifamily construction—excluding capital investment, labor, and imports, are already up 35 percent from five years ago and more than 50 percent from 10 years ago, making it hard for many new projects to pencil out, especially with higher borrowing costs. Further increases in the costs of materials will make it even more challenging, especially in parts of the country that might also be dealing with shortages of construction workers. Even if the number of new residential projects begins to stabilize over the next few months, it would be surprising to see a sharp rebound soon, even though the broader housing market clearly needs a lot more supply to reach more balanced conditions.

Kenneth D. Simonson, chief economist, The Associated General Contractors of America

Kenneth D. Simonson

Going into 2025, contractors responding to AGC of America’s annual outlook survey were moderately optimistic, on balance, about the prospects for multifamily and warehouse construction and far less negative than a year ago regarding retail projects. However, construction materials costs rose in January at the steepest rate in a year. While this may have reflected one-off increases in several inputs, the prospect of widespread tariffs makes further jumps in construction costs far more likely. Uncertainty about the timing and extent of tariffs has made pricing much more difficult, and is likely to cause disruptions to supply chains and postponement or cancellation of some projects. In addition, possible “mass deportations” would be very disruptive to construction workforces, leading to further increases in costs and completion times.

Daniel Aldrich, director, MS Resilience Studies Program, and Dean’s Professor of Resilience, Northeastern University

Wallau, Ruby/Wallau, Ruby

I expect the construction industry to see continued growth in 2025. New construction activity should pick up as interest rates potentially fall and loan originations increase. Construction spending will likely increase in 2025 for both private residential and nonresidential development. The dollar volume of construction starts is forecast to increase close to 9 percent. However, tariffs and Trump-led deportation and immigration restrictions could neutralize the market gains expected from interest rate cuts by increasing material prices and cutting the labor force. Importantly, states like California, Florida, and Texas face climate change-related obstacles that could potentially derail construction growth.

Rising construction costs have made developers more cautious. Materials costs on a typical construction project can range between 40 and 60 percent of total direct costs. The implementation of tariffs on Chinese imports, as well as retaliatory tariffs, will likely have a visible impact on construction supply chains. Should Trump and our trading partners trade blows in an extended tariff war, prices in 2025 may rise significantly. However, developers might offset some of these costs by investing in modern real estate development software and new technologies, such as modular construction to create efficiencies in project management.

Kiran Raichura, chief commercial real estate economist, Capital Economics, London

Kiran Raichura

In the U.S., we think the Trump administration’s proposed tariffs and immigration curbs pose an upside risk to construction costs. On tariffs, we are assuming an increase in average tariffs of 10 percent, with a large increase—60 percent—on imports from China. That would drive prices higher for essential construction materials such as concrete and steel. At the same time, an estimate by the National Association of Home Builders that a third of all construction workers are migrants suggests that immigration restrictions and the deportation of undocumented workers could lead to renewed labor shortages and increased costs. Given we also expect long-term interest rates to stay at current levels this year and no major economic recovery, that suggests development activity is likely to stay weak this year.

In the U.K., construction activity in recent years has been dented, partly by rapid cost increases. But commercial construction cost inflation fell from 9 percent year-over-year in March 2023 to 2.4 percent year-over-year in September 2024, the latest data point available. That return to more “normal” construction cost growth rates, along with expected decreases in interest rates and continued strong demand for prime space, should help construction activity gradually recover over the coming year.

Ryan Severino, CFA, managing director, chief economist, and head of research at BGO

Ryan Severino

This really depends on what the Trump administration does. Construction inflation has moderated considerably over the last few years. And for most property types, the forward pipeline for construction remains tepid, which should put limited upward pressure on construction inflation from demand. But all bets are off if the Trump administration goes forward with tariffs, especially if those tariffs hit construction inputs such as steel. If that occurs, then construction inflation could come under greater pressure. It almost certainly wouldn’t look like the cost pressures experienced during the last few years, when global supply chains got significantly disrupted. But tariffs absolutely would not help to slow inflation.

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