Marcus & Millichap’s October 2026 Construction Outlook argues that investors who focus primarily on demand are missing a critical part of the commercial real estate equation: long-term supply trends. The firm notes that development pipelines play a direct role in shaping vacancies and rent growth, and should therefore be central to portfolio and capital allocation decisions.
According to the research brief, construction activity typically trails underlying market conditions, which creates alternating periods of undersupply and oversupply. When new construction slows, vacancies tend to compress and rents rise, which in turn encourages more building. If that response overshoots demand, the additional supply can push vacancies higher and restrain rent growth until the market absorbs the new space.
The report emphasizes that different property types do not move through these cycles at the same pace. Each major asset class follows its own supply and demand dynamics, and wider macroeconomic factors or structural shifts can further alter the timing and intensity of these cycles. As a result, investors need to evaluate supply pipelines by sector rather than assuming a uniform pattern across the CRE landscape.
Marcus & Millichap highlights three main forces currently weighing on development. Higher interest rates have raised financing costs, which reduces the number of projects that can achieve acceptable returns. At the same time, tariffs and elevated shipping expenses are keeping construction material prices elevated. Labor costs are also under pressure, influenced by immigration policy and strong demand linked to AI-related projects and data center expansion.
With these cost pressures in place, the firm expects new construction starts to remain subdued until rents increase enough to restore development feasibility. That constrained pipeline could extend the phase of the cycle characterized by falling vacancies and rising rents beyond what has typically been seen in prior cycles.
The pullback is already visible across multiple sectors. In apartments, units under construction are down 50% from their 2023 peak and are still trending lower. In industrial, space under construction has fallen 60% from its 2022 high, with the pipeline continuing to contract. Self-storage construction investment is down 32% from its 2023 peak, while seniors housing and medical office are experiencing comparable declines in building activity. Retail and office development remain limited, and higher construction costs are expected to defer the next ground-up cycle in both segments.
Marcus & Millichap suggests that investors weigh demand drivers against shrinking supply and obstacles to new building, including policy constraints, land availability and cost, and infrastructure limitations such as water and power access. These factors could further curb future supply and create opportunities in existing properties that are already in place and positioned to benefit from a more extended period of tightening vacancies and upward rent pressure.
The brief draws on data from Marcus & Millichap Research Services, the Bureau of Economic Analysis, the Bureau of Labor Statistics, CoStar Group, the Federal Reserve, NIC MAP, RealPage and the U.S. Census Bureau.
