North American construction costs are forecast to rise 3.2% to 4.2% next year, while global construction costs will likely increase by 3.1% to 4.2%, according to a new report from JLL.

Global construction costs this year are expected to rise 3.5% to 4.7% due to a complex mix of global forces and local market conditions. Higher material and commodity prices are straining supply chains and contractor margins. Persistent labor shortages and annual wage growth have added further cost pressures. In North America, material costs, U.S. trade policies and labor shortages are the main pressures.

These conditions are expected to continue for the next three to five years, with cost escalation stabilizing at a new baseline of between 3% to 6% in annual increases. During that time, material prices are expected to swing by 20% to 40% in either direction, global interest rates should sit between 3% and 5% and labor markets will likely face structural shortages and wage premiums, JLL writes. Before 2020, annual cost increases generally rose between 2% to 3%.

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“Energy markets should settle after a volatile 2026, but the Middle East conflict persists, so contractors will keep pricing in uncertainty as a permanent risk premium,” JLL states in the report. “Material and commodity prices should stabilize but not decline.”

During the past five years, construction costs have risen by an average of 25% to 30% across global markets and by as much 40% in some regions. At the same time, U.S. consumer inflation has surged by about 35%.

Construction wages have risen between 8% and 35% across markets since 2020 and by 1% to 6% on average during the past year. U.S. construction wages rose more than 4% in the past year.

JLL’s global survey of projects and development services markets found that 64% of the markets reported shortages of skilled labor, compared with 48% for unskilled labor. These markets report shortages of electricians, carpenters, HVAC technicians and plumbers.

The labor shortages are directly affecting project costs. Data centers require the same skilled labor, so wage premiums are set to persist and widen.

This higher-cost landscape has resulted in the emergence of three approaches to capital planning and maximizing return on investment.

The first is the move to invest in premium assets, where quality differentiation justifies the premium. Investors are also broadening the value lens to full lifecycle returns and are focusing on strategic renovation programs that balance cost escalation against new-build expenses.