Access to electrical power has become the deciding factor in whether Phoenix construction projects move forward on schedule, even as demand remains healthy across industrial, office and retail, according to LGE Design Build’s newly released Q3 2026 Construction Delivery Outlook Report.

“Demand in Phoenix is still strong across major sectors, but the variables that determine whether a project gets built on schedule have changed,” said Blake Wells, vice president of preconstruction at LGE Design Build. “Early electrical procurement, realistic schedule contingency and close coordination with utilities belong at the top of every preconstruction conversation for the balance of 2026.”

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Key insights from the quarterly report include:

Phoenix Market Demand

Industrial

  • Vacancy fell to 9.6%, down 70 basis points quarter-over-quarter and 260 basis points year-over-year, as net absorption of 4.7 million square feet outpaced a pipeline that has thinned to 18.4 million square feet underway. That pipeline is up modestly as several large build-to-suit projects broke ground, and average asking rent climbed 2.8% quarter-over-quarter to $1.09 per square foot. 
  • Conventional speculative big-box construction has slowed considerably from its peak. Build-to-suit projects tied to the semiconductor supply chain now drive a disproportionate share of new starts, anchored by TSMC’s $265 billion North Phoenix campus and carrying specialized power, cleanroom-adjacent and mechanical requirements.

Office

  • Vacancy fell 70 basis points quarter-over-quarter to 25.4%, the fastest decline in more than a decade and the sixth positive-absorption quarter in the past seven. Net absorption of 450,074 square feet lifted the trailing 12-month total to a six-year high of 1.3 million square feet.
  • With essentially no speculative office construction underway, the recovery is coming almost entirely through tenant improvement as landlords invest in spec suites and amenity buildouts. Vacancy in buildings of 100,000 square feet or larger fell 80 basis points to a near-three-year low of 29.2%, compared with 18.0% for smaller buildings.

Retail and Mixed-Use/Hospitality

  • Phoenix retail remains among the tightest markets in the country, with about 1.1 million square feet of net absorption in the first half, the highest among major U.S. markets. Phoenix is projected to have a year-end vacancy of 5.2%, up only 30 basis points from a year earlier and still roughly 110 basis points below the metro’s ten-year average.
  • Retail construction is active at roughly 2.8 million square feet for the year, the second-fastest supply growth in the country behind Austin, with nearly 90% pre-committed and concentrated in the outer-suburb, master-planned corridors of the West Valley.

Power Availability

  • Arizona’s Energy Promise Taskforce, convened by Gov. Katie Hobbs, warned in April that proposed data center loads from Arizona Public Service and Salt River Project customers could require up to roughly 29,000 megawatts of new capacity, nearly triple the utilities’ current combined demand. It cited limited supply of transformers, switchgear and transmission components as a factor extending construction timelines.
  • Arizona’s FY2027 budget pauses new applications for the state’s data center sales-tax exemption from July 1 through June 30, 2029. The pause does not affect data centers already receiving the exemption or prohibit new construction, but it removes a decade-plus incentive for new projects entering the pipeline.
  • Medium-voltage switchgear lead times of 52 to 80 weeks are concentrated in the Phoenix market, while pad-mount transformers for standard commercial and industrial service run 40 to 65 weeks. Hyperscale and utility-scale projects face substation transformer lead times of 90 to 160 weeks, so a project that clears every regulatory hurdle may still wait two to three years to be energized.

Construction Labor

  • Arizona construction employment slipped to 226,700 jobs in July, down 1,800 from June but up 2.1% year-over-year, according to the Arizona Office of Economic Opportunity. Phoenix averaged 41,200 construction workers in the first half of the year, up 4% year-over-year, and semiconductor and data center demand were the primary sources of continued cost pressure.

Supply Chain & Material Costs

  • After U.S.-Canada trade talks collapsed, the U.S. imposed 50% tariffs on roughly $20 billion of Canadian goods in late August. Canada responded with tariffs on roughly $28 billion of U.S. imports, including steel and aluminum, effective Sept. 8. Canada is also among the largest foreign suppliers of steel, aluminum and softwood lumber to the U.S., and Section 232 tariffs on steel, aluminum and copper already stand at 50%.
  • Structural steel is emerging as a second bottleneck behind electrical equipment, with lead times more than doubling to 55 weeks in some markets as mills prioritize data center and semiconductor orders. Diesel has passed $6.00 per gallon and is up 77.8% year-over-year.
  • Nonresidential construction input prices rose 8.9% year-over-year through August, according to the Associated General Contractors of America, with aluminum up 27.3%, steel up 23.4%, copper and brass up 20.9% and lumber and plywood up 9.9% through July.

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