- Construction pipelines have contracted significantly across most property types, generally reflecting elevated development costs, financial constraints, and the need to absorb supply delivered during the prior cycle.
- Reduced construction does not necessarily mean a shortage of space. Demand for high-quality office space is strong and supply is constrained by interest in combining the right type of space with the right location.
- The timing of the glass-half-full implications of the supply contraction depends substantially on the interaction of fundamentals and the particulars of the slowdown.
- Elevated development costs, compounded by data center construction absorbing an outsized share of labor, materials, and electrical infrastructure, intensifies competition for existing properties, creating potential advantages for owners, operators, and lenders with exposure to well-positioned stabilized assets.
“If you can buy below replacement cost, why would you build?”
In the 2025 edition of Emerging Trends, the headline story was a supply surge. Record construction in industrial, multifamily, and life sciences was delivering new product into markets that, in many cases, had not experienced meaningful new supply in a decade. That wave has largely washed through the system, and what follows is development pipelines across most major property types have contracted to levels not seen in years, and the factors driving the contraction suggest it will persist.
The reasons for the slowdown are multiple and vary by sector. Across all property types, development costs have risen substantially with materials, skilled labor, and financing all contributing to a total cost of delivery that is meaningfully higher than when much of the current inventory was capitalized. In sectors like multifamily housing and industrial, the slowdown also reflects a natural correction: markets that experienced rapid development during the post-pandemic period are now absorbing that supply, and both developers and their capital partners are exercising caution about adding more. In other sectors, regulatory constraints, permitting delays, and, in the case of data centers, community opposition are extending development timelines or deterring new starts altogether.
The resulting picture varies by sector and geography. Some markets and sectors are approaching a period where limited new supply could begin to tighten operating conditions. Others have enough existing inventory and available space that the construction slowdown does not yet imply a shortage.
Where the Pipeline Has Contracted
The industrial logistics sector provides the most widely discussed illustration. The construction pipeline contracted sharply from its pandemic-era peak, and speculative starts slowed meaningfully through 2025 and into early 2026. More recently, national data suggests the pipeline has begun to stabilize and, in some markets, has started to expand again from those lows—a sign that developers with access to capital and pre-leasing activity are re-entering selectively. As further discussed in Chapter 2: Property Types, construction is resuming in targeted markets and size segments. But the recovery is uneven and several interviewees note that the overall volume of new competitive supply arriving over the next two to three years will remain well below the levels of 2022 through 2024, particularly for modern, large-format space in high-demand logistics corridors. As the head of a global logistics investment platform summed it up: “The under-construction pipeline is down significantly from peak. Expect undersupply of modern logistics within two years.”
In hospitality, supply growth has remained below 1 percent annually for several consecutive years. The economics of new hotel construction are particularly challenging at current cost levels. Several interviewees note that the gap between what it costs to build a new hotel and what it costs to acquire an existing one has widened to levels that strongly favor acquisitions. That dynamic may limit new competitive supply for an extended period, which could support operating performance for existing properties, particularly in markets where demand is stable or growing.
Multifamily housing starts have fallen to their lowest level in more than a decade. The multifamily picture is complicated by the fact that the country faces a well-documented housing shortage even as recently delivered multifamily assets in certain submarkets remain in lease-up. The wave of deliveries that pressured rents in fast-growing Sun Belt and Mountain West markets during 2024 and 2025 is now being absorbed, and the projects that would have been capitalized in those markets in 2023 and 2024 were largely not, given the financing environment. The gestation period for large-scale multifamily housing development means the effects of that underinvestment are likely to be felt through the end of the decade.
Office space under construction has contracted to approximately 19.7 million square feet nationally, a figure well below historical norms. The office market also carries the highest vacancy among major property types, but interviewees caution against interpreting limited new construction as an imminent supply shortage. The more nuanced view is that the absence of new supply is gradually rebalancing conditions in select submarkets—particularly for trophy and Class A product—while commodity and lower-quality office space continues to face structural demand challenges that a supply contraction alone cannot resolve.
Life sciences construction has also slowed dramatically following the speculative development surge of 2021 and 2022. Deliveries have fallen to very low levels in recent quarters, and the speculative lab shell development that characterized the peak period has largely stopped. The correction has been significant; vacancy remains elevated in several major research clusters, including the core Boston, San Francisco, and San Diego markets that attracted the most aggressive development. At the same time, leading indicators are more encouraging: venture capital funding into life sciences companies has reaccelerated, pharmaceutical M&A activity has resumed, and sublease availability has begun to decline in select markets. Occupancy appears to have hit bottom as of 4Q 2025 and has since experienced two quarters of improvement in 2Q 2026. The path from reduced construction to improved operating performance will depend on the pace at which capital formation translates into development, a lag that typically runs 12 to 24 months between a funding event and a signed lease.
The Role of Development Costs
The elevated cost of development is the common thread across sectors, and it has implications that extend beyond the near-term construction outlook. Development costs including materials, labor, and the cost of capital have risen an estimated 30 to 40 percent from pre-pandemic levels in many markets, driven by materials, labor, and financing. As one senior healthcare REIT executive puts it, “You can’t build a 20-year-old facility,” a concise way of describing why existing assets in several sectors carry a cost advantage that new development cannot easily overcome. That gap, while it persists, limits the volume of new competitive supply that the market can produce.
For owners of existing stabilized assets, the development cost environment creates a potential advantage: limited new competition from projects that simply cannot be built at rents the market will currently support.
Data center construction has introduced an additional layer of cost pressure in certain markets and trades. The artificial intelligence buildout is consuming electrical infrastructure, skilled labor, and general contractor capacity, and interviewees in several markets describe competitive dynamics in which data center projects attract resources that would otherwise serve other types of development. The effect is most pronounced in markets with significant hyperscale construction activity and in specific trades—electrical, mechanical, and structural—where data center specifications demand higher skill levels. It is less of a factor in markets without major data center development or in construction disciplines that are not directly affected.
Survey data from this year's Emerging Trends respondents confirm that cost and labor availability remain significant concerns: just over 60 percent of respondents cite construction costs and labor as a top disruptor, second only to artificial intelligence.
Timing and Implications
The timing of the glass-half-full implications of the supply contraction depends substantially on the interaction of fundamentals and the particulars of the slowdown. Much will depend on how quickly existing inventory is absorbed, when new deliveries slow, and whether demand is strong enough to support improved occupancy and rents. In industrial logistics, the case for a near-term, low-supply scenario is arguably the strongest. Demand drivers are well established, vacancy in many markets has begun to normalize, and the pipeline contraction is advanced enough that competitive new supply over the next two to three years will be limited. Owners of modern, well-located distribution facilities are positioned to benefit as the market tightens.
In the multifamily sector, the low supply benefit is sector- and geography-dependent. Markets that overbuilt during the prior cycle still have absorption to complete before constrained supply translates into meaningful rent growth. Markets that were already supply-constrained, often because of regulatory barriers to development, may see the benefits sooner. The household formation and affordability dynamics discussed in Trend 4: Demographics: The Compounding Variable also matter. Constrained supply helps existing owners only to the extent that demand materializes at rents the market can support.
In the office sector, the supply picture is more complex, as detailed in Chapter 2: Property Types. Limited new construction is a positive for owners of high-quality assets in tight submarkets, but it does not resolve the structural vacancy challenge that the broader sector faces.
The broader observation is that the supply cycle is turning but how that plays out varies considerably by sector, and the lag between declining construction starts and improved operating conditions for existing assets is longer than it may appear. Except for housing, the supply gap is more of a forward-looking story than a present-tense condition in every market.
The investment implication is one of sequencing. The sectors where the pipeline contraction is most advanced and where demand drivers are most durable (industrial logistics in supply-constrained markets, hospitality in segments where new construction is cost-prohibitive, multifamily housing in markets that did not overbuild) are likely to see the benefits first. Office and life sciences, where vacancy remains elevated despite limited new construction, may take longer to reach the inflection point. For investors, developers, operators, lenders, and advisers, the discipline lies in distinguishing between sectors where reduced supply is already creating operating advantages and sectors where the gap between declining starts and improving fundamentals has not yet closed.
