Marcus & Millichap's October 2026 Construction Outlook argues that long-term supply patterns will be as important as demand when evaluating commercial real estate strategies. While many investors lean heavily on demand forecasts, the research brief emphasizes that construction pipelines and broader supply dynamics directly shape vacancy trajectories and rent growth across asset classes.
The report notes that development cycles typically trail underlying market conditions, which can lead to periods of overbuilding followed by undersupply. When new construction slows, vacancies tend to decline and rents rise, eventually encouraging another wave of development. If that expansion phase overshoots underlying demand, vacancy can climb and rental rate growth can come under pressure.
According to Marcus & Millichap, these cycles are not synchronized across property types, as each sector follows its own rhythm. Broader macroeconomic influences and structural changes in the economy can further alter the timing and intensity of each cycle, contributing to divergent performance by asset type.
The brief identifies three main factors that are currently constraining new development. First, higher interest rates have pushed up borrowing costs, making fewer projects pencil out. Second, tariffs and elevated shipping expenses are keeping construction materials relatively expensive. Third, labor costs remain under strain, influenced by immigration policy as well as robust demand from AI and data center projects that are competing for the same construction workforce.
With financing, materials, and labor all adding to development costs, the firm expects new project starts to remain subdued until rents rise sufficiently to restore construction feasibility. This environment could extend the current phase of declining vacancy and increasing rents beyond historical norms, as limited new supply reaches the market.
Pipeline data already show a pronounced pullback. In apartments, units under construction are down 50% from their 2023 peak and are still trending lower. Industrial space under construction has fallen 60% from its 2022 high and continues to contract. Self-storage construction investment has declined 32% from its 2023 peak. Seniors housing and medical office are also experiencing comparable reductions in development activity. In retail and office, new construction remains restrained, and elevated building costs are likely to push out the timing of the next development cycle.
Marcus & Millichap suggests that this slowdown in new supply could delay the onset of the next major building wave by several years, potentially lengthening the period of tightening vacancies and upward rent pressure. For investors, the firm recommends weighing demand drivers alongside falling construction pipelines and growing barriers to ground-up projects when underwriting opportunities.
The research brief also highlights that policy decisions, land availability and pricing, and infrastructure limitations such as water and power capacity may further curb future supply. Those constraints may enhance the value of existing properties if development remains difficult to finance and execute. The analysis 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.
