The Cost to Build industrial

Construction costs poised to rise again

While development feasibility had begun to improve during 2025, this progress is now reversing.

Construction costs moderated from their 2022 peak as builders priced more competitively to secure work, ultimately reducing their margins. Combined with modest yield compression during 2025, this allowed some projects to become viable again.

However, the outlook for construction costs has shifted rapidly since early March 2026. Geopolitical tensions in the Middle East have already flown through to higher construction costs, driven by both materials and the pass-through of fuel-related surcharges.

Several building material manufacturers have implemented price increases, in some cases of up to 40%. Recent discussions with major industrial builders suggest that warehouse construction costs have already increased by 6.5% over the past quarter, with further costs rises expected for the balance of the year.

Unlike 2021 and 2022, where cost escalation was primarily driven by delays in material imports, current pressures are expected to be more sustained, underpinned by higher energy costs across the supply chain.

Feasibility pressures and the role of economic rents

Cost pressures are not the only challenge facing developers.

The increase in interest rates in the early part of 2026 has also raised the cost of capital for development projects, and with further tightening expected, this will flow through to development feasibility.

In practical terms, developers require economic rents (the rent required to justify a new build) that sit well above prevailing market rents before committing to new projects. The challenge though, is that in most markets, economic rents are already 10% to 25% above prevailing market rents, and this gap is likely to widen further as construction costs escalate.

Until market rents close this gap, developers are likely to remain cautious about activating projects.

When is the tipping point?

The indicative tipping point for development was expected in 2027, supported by a combination of rising rents, yield compression, and a moderation in real construction cost growth. 

However, incorporating a 15% increase in construction costs and 25 basis points of yield expansion over the next 12 months, the tipping point shifts toward late 2028/early 2029, although stronger-than-expected net effective rental growth could partially offset this impact. 

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