Office Construction Costs Ease, But Tariffs and Labor Persist
Inflationary pressures have eased across the Americas, leading to a significant slowdown in construction cost increases. According to Cushman & Wakefield’s Winter 2025 General Contractor Sentiment Survey, cost escalations have now fallen below their five- and ten-year averages. However, the construction industry remains vulnerable to new challenges, including U.S. tariffs on imports from key trade partners like Canada and Mexico. Additionally, rising labor costs and persistent increases in commodity prices—such as lumber, steel, copper, and cement—are expected to extend into 2025.
“While we’re seeing the pace of inflation slow on construction costs, there remain serious headwinds and uncertainty about the impact of tariffs and labor shortages on the construction industry,” said Brian Ungles, President of Project & Development Services, Americas. “Our survey shows that general contractors expect permitting times will continue to be a major pain point as well, leading to project delays and more uncertainty.”
Office Construction Pipeline Shrinks
The new office construction pipeline has declined by 40% year-over-year (YOY) across the Americas. This significant drop in new office developments has resulted in limited availability of newly built office space. Consequently, companies looking for office space may need to shift their focus to upgrading and retrofitting existing spaces rather than seeking out brand-new properties.
“While new office construction pipeline has decreased, costs for all construction will continue to rise with more fit-out activity in existing offices and the strength of new construction in other property sectors, which increases competition for construction materials and labor,” said Richard Jantz, Tri-State Lead, Project & Development Services.
Rising Costs for Office Fit-Outs
As the supply of new office buildings dwindles, many companies are opting to renovate and fit out existing spaces. However, fit-out costs remain on an upward trajectory. To help offset these expenses, Class A office landlords have increased tenant improvement (TI) packages by an average of 7% YOY. Some markets have seen even steeper increases, with TI allowances rising as much as 20% YOY. Despite these adjustments, fit-out costs have escalated to the point where occupiers must carefully evaluate their budgets to fully understand out-of-pocket expenses.
The Role of the 2025 Office Fit-Out Cost Guide
To assist companies in navigating these financial challenges, Cushman & Wakefield has released its 2025 Americas Office Fit Out Cost Guide. This comprehensive resource provides detailed insights into construction costs across 58 key markets, helping occupiers refine their capital planning and relocation strategies. The guide includes up-to-date costs for various architectural trades, including millwork, drywall, acoustic ceilings, doors, frames, and hardware, as well as electrical, mechanical, plumbing, and fire protection work.
New for 2025, the guide introduces an all-in cost calculation process that incorporates essential elements such as Low Voltage Cabling, Audio Visual Equipment, Security, and Furniture, Fixtures & Equipment (FF&E), along with associated soft costs. This broader cost analysis enables businesses to more accurately forecast their overall expenditures when planning office space improvements.
Impact of Tariffs and Labor Market Conditions
Beyond inflation, the construction industry is facing additional hurdles due to newly imposed U.S. tariffs. These tariffs target critical materials sourced from Canada and Mexico, potentially driving up costs for projects dependent on imported goods. Additionally, labor shortages continue to impact project timelines and budgets. General contractors report that staffing shortages remain a top concern, leading to increased labor costs and project delays.
Another major issue highlighted in Cushman & Wakefield’s survey is the prolonged time required for permitting. Lengthy approval processes are causing delays across numerous projects, further complicating construction timelines and budgets. Industry leaders stress the need for streamlined permitting processes to reduce uncertainties and improve project delivery efficiency.
Broader Industry Trends and the Future Outlook
While the office construction sector faces significant headwinds, broader industry trends indicate continued demand for commercial real estate renovations. Many companies are adapting to hybrid work models, prompting increased investment in reconfiguring existing office spaces to accommodate flexible work environments. The shift toward sustainability and energy-efficient buildings is also driving demand for retrofits that improve operational efficiency and reduce long-term costs.
Looking ahead, the construction industry must navigate a complex landscape of economic fluctuations, policy changes, and shifting market demands. While inflationary pressures may be easing, ongoing uncertainties surrounding tariffs, labor markets, and regulatory hurdles will continue to shape the future of office construction.
