May 14, 2025 | BOMA International, Ella Krygiel
Rising construction costs are impacting both the industrial real estate and medical real estate sectors respectively. As a result, investors are weighing decisions about whether or not to build new or improve their current and existing facilities. Claris Design Build determines six factors influencing construction costs in 2025:
- Material costs: Commercial construction costs continue to rise in 2025, driven by volatile material prices—particularly steel, lumber, concrete, and asphalt—amid shifting economic trends, tariffs, and energy market fluctuations.
- Labor costs: Labor costs in commercial construction are rising due to steady wage growth, a shortage of skilled tradespeople and an aging workforce, all of which are intensifying competition for qualified labor.
- Location factors: Construction costs vary widely by region, with major cities like New York and San Francisco facing significantly higher expenses due to elevated labor rates, material logistics, and strict regulations, while Midwestern and Southern cities benefit from lower costs driven by more affordable labor, easier material access, and lighter regulatory burdens.
- Building type and design complexity: Construction costs per square foot vary widely by building type and complexity, with industrial facilities like warehouses typically costing $150–$300, while more specialized projects—such as hospitals or high-rise offices—can exceed $1,000 per square foot due to advanced systems and regulatory demands.
- Market conditions: Inflation and interest rates continue to elevate commercial construction costs in 2025, with rising consumer prices and high borrowing rates challenging project feasibility despite forecasts for potential rate cuts later in the year.
- Regulatory and compliance costs: Stricter building codes and sustainability standards—especially in regions like the East and West Coasts—are driving up commercial construction costs, with regional differences largely shaped by labor rates, code requirements and material availability.
This environment has led to striking parallels across sectors—including healthcare, where rising costs and capital pressures are reshaping development decisions. At the 2025 Medical Real Estate Conference session, “Capital Strategies: How Investors are Thriving in ‘25 and Beyond,” panelists discussed how high construction costs, limited spec development and cautious capital deployment are impacting medical office buildings (MOBs)—offering a useful lens into broader market dynamics.
As panelist Chriss Papayannis, Vice President at RTG, pointed out during the 2025 Medical Real Estate Conference, “MOB construction is at an all-time low,” with rising costs significantly influencing decision-making in the medical real estate sector. He emphasized that, despite some signs of market recovery, “construction costs are still high,” with price per square foot rising from around $100–$120 pre-COVID to $175–$200 or more in certain markets.
As a result, developers are increasingly cautious. While MOB construction might be seeing some decline due to high costs, the industrial real estate sector has experienced growth in recent years, driven by the surge in e-commerce and the increased demand for distribution channels. However, this growth could face headwinds as inflation continues to rise. According to a JP Morgan article, inflation’s economic impacts can make these sectors more susceptible to consumer behaviors: “As consumer sentiment wanes, retail and industrial real estate and the businesses that operate within them feel the reduction in discretionary spending more acutely.” Essentially, as consumer behavior shifts, the industrial real estate market and its supply will likely follow suit, adjusting to these changes in demand.
Despite challenges like inflation and tariff pressures, Kessinger Hunter remains optimistic about the industrial real estate sector’s trajectory. In particular, they point to continued growth in sustainability-focused developments, including energy-efficient facilities and renewable infrastructure as major areas of opportunity in 2025. As developers contend with higher material and labor expenses, as well as regulatory pressures and shifting consumer behaviors, the emphasis is increasingly on quality over quantity. In this environment, strategic investments in resilient, future-proof assets may offer the best path forward.
Interested in more content like this? Read our recent articles, 2025 Industrial Markets Outlook or Manufacturing’s Resilience Amid Tariff Challenges. You can view all this content and more when you click here to sign up for our Industrial newsletter!