By Roland Murphy for AZBEX
A pair of Arizona construction industry reports issued this week show construction costs may be starting to settle, even as the rate of activity normalizes following the recent extended period of growth.
In its Phoenix Q4 2025 Cost Index, Mortenson reported nonresidential construction conditions remained steady in Q4, and cost escalations continue to moderate nationwide.
Quarter-over-quarter price increases softened, but activity earlier in 2025 ensured the year-over-year growth remained elevated, as “persistent input pressures in select materials and labor categories” remain.
“Nationally,” the report said, “nonresidential construction costs tracked by the Mortenson Quarterly Cost Index for the fourth quarter of 2025 rose by +1.05% over the past quarter and +7.35% over the previous twelve months.” All of the company’s regional offices reported Q4 cost increases. Seattle showed the smallest increase at 0.30%, while Milwaukee was highest at 1.96%. Phoenix was second highest at 1.58%.
As nearly every market report of the last several months shows, demand focused on data centers and advanced manufacturing continues to increase, even as activity in other sectors slows, leading to uneven behavior across the overall market. Planning activity for data centers, infrastructure and some institutional sectors is still high, but momentum appears to be moderating when viewed month-to-month.
Mortenson said, “From a supply chain perspective, conditions entering 2026 reflect improving resilience rather than full normalization.”
Transportation costs are stabilizing, and lead times have improved in several areas, but metals pricing (particularly for steel, copper and aluminum), long-lead electrical equipment and tariff uncertainty continue to impact inputs broadly.
While planning activity remains higher than at this point last year, architectural billings are soft across significant portions of the design pipeline. The theory is that overall project volume growth may stay constrained for the short-term, even though large scale project volume remains active.
In terms of major cost components, Mortenson observed mixed material and labor costs. “Trade partner work increased modestly by +0.6%, while tracked construction materials rose +1.9%. Year-over-year, labor costs increased +5.6% on average, materials rose +9.1%, and trade partner work increased +6.2%.”
Mortenson uses Bureau of Labor Statistics data for the Phoenix-Mesa-Chandler statistical area for its employment numbers and reported a year-over-year percent change in Building Construction of 6% over 2024. In its Q4 2025-Q1 2026 Construction Delivery Outlook, LGE Design-Build appears to source its numbers from the Arizona Office of Economic Opportunity and reported a 0.06 percent change for Q4, saying, “Arizona construction employment increased to 226,800 jobs in December, up 1,200 month-over-month and nearly 6,000 year-over-year, with growth led by building construction and specialty trades. Gains were concentrated in the Phoenix metro area, while heavy construction and the Tucson market saw modest year-over-year declines.”
LGE Core Market Demand Review – Phoenix
LGE also reported the Phoenix market showing clear signs of stabilization toward the end of 2025 after years of higher-than-average growth and high delivery volumes.
Following a pause in the first half of 2025, Industrial increased “significantly” in the second half, as new deliveries slowed and net absorption sped up, leading to a noteworthy drop in the vacancy rate by the end of the year.
Tenants became more selective, but leasing activity—particularly for logistics, technology and manufacturing—remained higher than the multiyear average. Larger format buildings are seeing a resurgence, but construction activity slowed year-over-year, and speculative starts decreased.
After years of slowed interest, Office saw the strongest net absorption since 2019. Older spaces saw continued pressure, but vacancies declined overall, largely driven by interest in Class A and B space. Most of the construction activity was centered on tenant improvements, but the sector appears to be moving into early recovery.
Retail construction activity saw moderate increases, but it is still minimal compared to the overall demand, which indicates a movement toward demand-driven versus speculative development. Ongoing population growth and new household formation should continue to drive sustained buildout opportunities.