Construction Costs Are Still Rising And Bids Haven't Caught Up Yet

The thin apartment construction pipeline usually gets explained by interest rates. JLL's 2026 midyear U.S. Construction Perspective points at something more durable: building has become structurally more expensive, and the largest increases haven't reached bids yet. For owners of existing multifamily, that changes what the next several years look like.

Costs Are Still Climbing

JLL puts final construction cost indices roughly 5% above year-ago levels — already near the top of the range the firm forecast earlier in the year. This isn't a story about one volatile input. The pressure is broad-based, and JLL expects more of it in the back half of 2026 as contractors defend margins they have already thinned about as far as they can.

The Increase Hasn't Fully Hit Bids

The more useful number is the gap. Goods-level material prices rose 6.4% year-over-year, while final-demand prices — what owners actually pay — rose 3.5%. Contractors have been absorbing the difference. JLL expects much of that gap to close before the year is out, which means current bids understate what 2027 and 2028 work will cost. Contractors are already pricing forward against a higher baseline.

Tariffs Are Repricing the Materials Basket

Metals are doing the heavy lifting. Structural steel and aluminum face tariff rates of 50%, and spot prices have followed — copper up 36% year-over-year, aluminum up 45%, and U.S. hot-rolled coil steel up 27%. JLL had set roughly 8% as the upper bound for full-year materials inflation and now sees a meaningful chance of reaching it.

Labor Is the Harder Constraint

Materials reprice; trades don't materialize. Construction employment is growing at 0.6% annually against a 2.7% historical average, and JLL estimates 61% of U.S. metro markets are already labor-constrained — a share it expects to reach 72% by 2027. Electricians and HVAC technicians are the tightest, which matters because data center and power infrastructure projects draw from exactly the same pool. Contractors working data center projects carry an average backlog of 12.2 months, compared with 8.3 months for other commercial work.

Arizona Sits at the Center of That Competition

Nowhere is the collision more visible. On August 31, Attorney General Kris Mayes called for a statewide pause on new data center approvals, citing grid strain, rising utility bills, and a nearly 30% reduction in Arizona's Colorado River allocation. Whatever comes of the policy debate, the underlying constraint holds: hyperscale campuses across the Valley are bidding for the same electricians and pipefitters an apartment developer needs. Meanwhile, Phoenix multifamily units under construction fell to 15,974 in Q2 2026, down 35.5% from 24,746 a year earlier, according to Kidder Mathews.

The Bigger Picture

The pipeline is thin, and the reasons it is thin are not the kind a rate cut reverses. Materials inflation is running ahead of what has been passed through to owners, tariffs remain in place on the metals that matter most, and skilled trades are being absorbed by infrastructure projects that pay more and book longer. That combination raises the cost of every unit not yet built — which is another way of saying it raises the value of every comparable unit that already exists. Supply delivered in 2028 and 2029 will have to clear rents that justify a materially higher basis than today's stock required.

For Neighborhood Ventures, this is the arithmetic underneath a value-add strategy. Acquiring 1970s- and 1980s-vintage Phoenix multifamily below replacement cost becomes more compelling as replacement cost climbs — renovation dollars compete against new construction that gets more expensive to deliver every quarter. That's the kind of spread we want to be buying into.