The Phoenix construction market is entering 2026 with renewed stability and sector-specific momentum, even as data center and AI-driven infrastructure projects create new labor and equipment pressures, according to LGE Design Build’s newly released Q4 2025/Q1 2026 Construction Delivery Outlook Report.

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“Phoenix has transitioned from an overheated growth cycle into a more measured and strategic phase,” said Blake Wells, vice president of preconstruction at LGE Design Build. “Industrial demand has improved, retail remains exceptionally tight and office is beginning to regain momentum. At the same time, the surge in data center and AI infrastructure is reshaping labor availability and procurement timelines, making early planning and tight coordination more important than ever as we move into 2026.”

Key insights from the quarterly report include:

Phoenix Market Demand

  • The industrial sphere improved meaningfully in the second half of 2025. Net absorption accelerated while new construction deliveries slowed, resulting in a notable decline in vacancy by year-end. Leasing activity remained historically elevated, supported by logistics, manufacturing and technology users. At the same time, construction activity decelerated significantly year-over-year, with fewer speculative starts moving forward.
  • The office market posted its strongest quarterly net absorption since 2019, signaling renewed tenant engagement after several years of muted activity. Vacancy declined in Q4, driven primarily by Class-A and B space, while older and less competitive product continued to experience pressure. Construction activity remained concentrated, focusing heavily on the tenant improvement space. 
  • Retail continues to be the tightest sector in the Phoenix market. Construction activity increased modestly, though it remains measured relative to demand, indicating that new projects are largely need-driven rather than speculative.

Data Center and AI Infrastructure Boom

  • The rapid expansion of data centers and AI-driven infrastructure continues to influence construction markets well beyond the hyperscale sector. Phoenix is seeing increased activity, with downstream impacts on labor availability, material pricing and project scheduling across commercial construction.
  • Phoenix remains an attractive market for AI and high-performance computing due to available land and proximity to major technology and semiconductor investment. However, power availability has become a key constraint, with utility capacity, substation timing and long-lead electrical equipment increasingly shaping project timelines and feasibility.
  • Data center construction is pulling electricians and specialty trades away from traditional commercial and tenant improvement work, while driving increased demand for switchgear, UPS systems, generators and advanced cooling equipment. Even projects outside the data center sector are feeling these effects, as labor competition and long-lead equipment continue to influence cost and schedule assumptions.

Construction Labor

  • 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.

Supply Chain

  • The construction supply chain stepping into 2026 is notably more stable than in recent years, though it remains shaped by policy shifts and labor constraints rather than physical shortages. 
  • Global manufacturing conditions are mixed, but reduced stockpiling, easing transportation bottlenecks and improved logistics reliability have led to fewer surprise disruptions. 
  • Rail volumes increased roughly 2–3% year over year, reinforcing rail as the most dependable long-haul option, while ocean freight demand remained relatively flat and trucking activity cooled following the post-tariff shipping surge. 
  • Tariff clarification has improved forecasting and procurement planning, even as elevated tariffs continue to influence sourcing strategies and encourage reshoring and alternative supply paths. 
  • Labor remains the most persistent constraint, with widespread workforce shortages contributing to schedule risk across the supply chain.

Material Costs

  • Material costs in Q4 2025 show signs of stability following several years of sharp volatility, though pressure remains uneven across categories. 
  • Overall construction material costs rose modestly quarter over quarter, with metals such as steel, conduit and copper continuing to experience the most upward pressure due to tariffs, production constraints and steady demand from data centers and infrastructure projects. 
  • In contrast, materials like framing lumber, concrete block and insulation have remained relatively stable or declined slightly, helping offset increases in higher-risk categories.

To view the full Construction Delivery Outlook report, click here. For more information, visit LGEDesignBuild.com.