Whether it’s a ground-up industrial project or an office buildout for a new lease, rising construction costs are negatively affecting landlords’ and tenants’ ability to upgrade their real estate. A combination of material-price volatility, tariff increases, the ongoing Iran war driving up oil costs, skilled-labor shortages, tighter financing, and long equipment lead times is directly affecting businesses’ real estate decisions.
“Construction firms are being squeezed by tariff- and war-induced materials cost increases, even as they boost wages to attract personnel,” said Ken Simonson, the chief economist of the Associated General Contractors of America (AGC), in a September press release. “Those cost increases, according to our latest survey, are a major reason project owners are canceling, postponing, or scaling back projects.” More than half—55%—of respondents in the recent AGC and National Center for Construction Education and Research (NCCER) survey reported having “at least one non-data-center project canceled, postponed or scaled back during the previous six months.”
The largest price increases affected petroleum products, along with metals that are subject to tariffs of up to 50%. The producer price index for diesel fuel, which reflects prices at the refinery or fuel terminal level, jumped 77.8% from August 2025 to August 2026. And that was before crude oil topped $100 a barrel ($105.83 for WTI crude on September 15 before retreating to the low-to-mid $90s at the end of September). Diesel prices also increased from $5.90 per gallon nationally on Labor Day ($7.78 in California) to $6.40 per gallon ($8.40 in California) on September 28, according to AAA.
Beyond raising the cost of trucking concrete, steel, and lumber to job sites, crude oil is a key input in construction materials such as liquid asphalt, PVC pipe, insulation, and the oil-based paints, coatings, and adhesives used in both tenant fit-outs and ground-up projects.
“Prices for iron and steel, softwood lumber, switchgear, copper wire and cable, and several derivative metal products are now up more than 10% year over year, according to a September release by Associated Builders and Contractors (ABC).
The Labor Problem
On top of higher prices for materials, diesel, and oil-based products, the industry faces a severe labor shortage, driven primarily by an aging construction workforce, a pronounced increase in data center construction, and enhanced enforcement of immigration policy. According to an ABC Southern California chapter article, “70% to 80% of construction companies report difficulty finding qualified workers.” In Southern California, skilled tradespeople like plumbers, electricians, sheet metal workers, and low-voltage technicians are in critically short supply. These shortages are causing project delays (45% of contractors report delays due to insufficient workers), higher overtime costs, and quality concerns due to hiring unskilled labor.
Aging Workforce: More than 1 in 5 construction workers is older than 55, with more than 40% of the construction workforce expected to retire by 2031. Many of these workers are either highly skilled or in supervisory positions, compounding the problem for the industry.
Data Center Construction: Although some communities are pushing back on data center construction, there are projects underway in Southern California, including the LAX02 Vernon Data Center being built four miles from downtown of Los Angeles. These massive construction projects strain available labor, particularly skilled workers like electricians, HVAC technicians, and specialized mechanical-electrical-plumbing (MEP) trades, who are most in demand for data center construction because of the facilities’ complex electrical wiring systems, heavy power distribution, and precision cooling systems.
“The need for people to work on new data centers is keeping labor conditions tight even as demand for many other types of projects remains relatively soft,” said Simonson in an AGC survey press release.
Immigration Enforcement: Many states rely on foreign-born labor in the construction industry. According to the National Association of Home Builders (NAHB), California, Texas, Florida, and New York account for more than 50% of nation’s immigrant construction workforce. California has more than half a million foreign-born construction workers—immigrant workers make up 41% of the construction workforce and more than 50% of the state’s skilled construction tradespeople. The AGC and NCCER survey also noted that “29 percent of respondents reported at least one direct or indirect impact from immigration enforcement activities during the past six months. Six percent report that a jobsite or offsite location was visited by immigration agents, 12 percent say workers left or failed to appear because of actual or rumored immigration actions, and 16 percent report that subcontractors lost workers.”
Industry organizations like ABC and AGC are investing in workforce development programs and urging Congress to reform immigration laws to address the labor issues, but those initiatives will take time to bear fruit.
SoCal Construction Costs
Construction costs are affected by many factors such as materials, supply chain, labor supply, site conditions, regulatory and entitlement costs, financing costs, building type, and quality of finishes. Physical location also factors into the construction costs.
Santa Clarita-based Durst Builders estimates these broad hard-cost ranges for the various product types in the Los Angeles, Orange, Riverside, and San Bernardino Counties:
- Office Buildings: $150–$350 PSF
- Retail & Tenant Improvements: $100–$250 PSF
- Restaurants & Specialty: $250–$600 PSF
- Institutional & Medical: $350–$700+ PSF
- Warehouse/Industrial: $70–$140 PSF
The Terrapin Construction Group uses a slightly different classification system and estimates the cost for each asset type in the San Diego market:
- Class A Office (Ground-Up): $545–$745 PSF
- Class B/C Office (Renovation): $345–$475 PSF
- Retail: $245–$365 PSF
- Full-Service Restaurant: $445–$745 PSF
- Medical Office Building (MOB): $475–$640 PSF
- Industrial/Warehouse (Ground-Up): $185–$285 PSF
Brokers Are More Important Than Ever
Escalating material and labor costs mean Tenant Improvement (TI) allowances can no longer deliver the same value they once did, and likely won’t in the near future. That’s why it’s important to enlist the services of an experienced real estate advisor. A broker can help tenants maximize their TI allowance by negotiating turnkey buildouts, securing higher landlord allowances, or structuring flexible concession packages. Landlords also benefit from a trusted advisor who can evaluate project feasibility, identify improvements that attract quality tenants, and structure lease terms that keep space competitive without overextending capital.
To learn more about how we can assist you with your commercial real estate needs, contact one of Voit Real Estate Services’ trusted commercial real estate advisors.