Although construction costs are estimated to be relatively flat year over year, with a moderate increase of 5–7% projected, there are many variables that can affect this estimate so early in the year. Construction costs in the commercial real estate sector are driven by a combination of economic, material and labor market dynamics. Factors such as natural disasters, a changing political climate and tariffs, among other influences, can have a significant impact on costs and the future of commercial development.
The Cost Effect
One of the primary contributors to the escalating construction costs is the price of raw materials. The costs of essential building materials like steel, lumber and concrete have risen dramatically over the past few years. Supply chain disruptions caused by the COVID-19 pandemic initially triggered these increases, and ongoing geopolitical tensions, along with energy price volatility, have further added to the issue.
Steel prices especially have seen substantial fluctuations, with analysts attributing the instability to supply chain bottlenecks and increased demand from infrastructure projects. Lumber, after experiencing historic highs in 2021, remains above pre-pandemic levels due to sustained demand and inflation. Both steel and lumber are expected to remain high throughout 2025.
According to AIA (American Institute of Architects), with challenging costs, a tough lending market and reduced architectural firm billings, spending on construction is expected to slow in 2025 to an increase of only 2% over 2024. Outside of a few niche sectors such as manufacturing and institutional construction, development is expected to be relatively flat year over year. AIA Chief Economist Kermit Baker, Ph.D., says, “Despite the challenges, specific sectors like manufacturing construction are showing strong ongoing activity from the surge in projects that started during the pandemic, while most institutional sectors are seeing reasonably healthy gains, fueled by the education market.”
Labor Market Pressures
The construction industry is also facing a persistent labor shortage, driving up wages and overall labor costs. Skilled tradespeople, such as electricians, plumbers and carpenters, are in short supply, a trend exacerbated by the aging workforce and a lack of new entrants into the field. This shortage has forced construction firms to offer higher wages and benefits to attract and retain workers, further inflating project costs.
Future immigration policy may also have an impact on the already strained labor force. Andrew Volz with JLL explains that an estimated nearly 30% of the construction labor force is foreign-born, and the future of immigration policy may have an impact on available labor, especially in high-growth markets.
The competition for labor extends beyond the commercial real estate sector, with residential construction and infrastructure projects also vying for the same pool of skilled workers. This inter-sector competition has intensified the labor cost pressures faced by commercial developers. With the future of immigration policy uncertain, Volz says, “The impact on residential will be larger than [on] commercial real estate, and in areas impacted by disasters across the Southeast, this could mean unwelcome delays in the already difficult process of rebuilding.”
Strategic Responses from the Industry
In response to these challenges, the commercial real estate industry is exploring various strategies to mitigate the impact of rising costs. Some developers are turning to alternative materials and construction methods, such as modular construction, to reduce costs and improve efficiency. Others are leveraging technology, including building information modeling (BIM) and project management software, to optimize project planning and execution. Neoroject and the 2025 Construction Costs Forecast share that BIM combined with other technologies reduces costs and rework throughout a construction project by allowing enhanced digital models of buildings.
Additionally, there is a growing focus on sustainability and energy efficiency in new commercial projects. While these initiatives may require higher upfront investments, they are expected to yield long-term savings and align with evolving regulatory standards and tenant preferences.
Outlook for the Future
The outlook for construction costs in commercial real estate remains uncertain. While some analysts predict a gradual stabilization as supply chain issues are resolved and labor markets adjust, others caution that persistent inflationary pressures could sustain elevated costs for the foreseeable future.
For now, stakeholders in the commercial real estate sector are navigating this challenging landscape with strategic planning, innovative solutions and cost-cutting ideas to continue to meet growth demands. As we move forward, the focus will remain on balancing cost control with the delivery of high-quality, sustainable and competitive commercial spaces. Remaining creative and agile will be a key to success. To continue to grow and develop we will: Improvise. Adapt. Overcome.
Kim Ryder is a dynamic commercial real estate executive with extensive experience in managing multi-million-dollar, complex projects and the build-out of more than 54 million square feet of retail and commercial space. Ryder has started several business lines in her career, most notably launching Thrive Real Estate and Development groups. Her career in the thrift industry extends over 25 years and led her team to expand the Goodwill real estate portfolio by more than 100 locations, having leadership over more than 400 transactions. Her expertise in thrift real estate has made her a well-known resource of knowledge.
