REGIONAL OVERVIEW

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PERFORMANCE

Confidence returning alongside a drive for renewed industrial and defence investment

As inflation eases, Europe’s construction industry is showing promising signs of increased performance following the upheaval of COVID-19 and conflict in Ukraine. The task will now be to capitalise on growing industrial, sustainability and defence-led demand and to weather further political challenges at home and abroad.

Market confidence is returning to Europe’s construction industry, driven in part by improved resilience in supply chains and growing demand across traditional real estate, particularly in residential, leisure and commercial. High-tech sectors, in which Europe has typically excelled, are also helping to maintain investment with data centres and advanced manufacturing fuelling further growth. The impact of the global tariffs landscape is also becoming better understood.

In traditional high-cost construction markets such as Switzerland, ongoing demand in the life sciences, data centres and corporate occupier sectors is being supported by a stable economic and political landscape. As a result, the average cost to build here has reached US$5,386 per m².

Investment in the wider region is being somewhat buoyed by cooling construction cost escalation – helped by a wider decrease in consumer price inflation (CPI) across the continent as central banks make concerted efforts to drive inflation to the 2.0 percent target. A particularly stark example is Poland, which has seen a reduction in CPI from its peak of 18.4 percent in 2023 to 4.3 percent in April 2025. This is reflected in the country’s construction cost inflation, which we predict to decline in Warsaw, for example, from 5.1 percent in 2024 to 2.8 percent in 2025.

Many countries across the region are accelerating their industrial and defence capabilities in the face of shifting geopolitics and conflict on the Continent. The expected surge in spending provides significant opportunities for construction, but capacity will need to be managed carefully to avoid overstretching supply chains and risking viability.

Breakdown data

Data: Tendering conditions

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Data: Key challenges

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Data: Supply chain

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Data: Labour

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Data: Digital (BIM)

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Top performing sectors

Data centres

Corporate occupier (office fit-out)

Residential and social housing

Capacity and lead-in time challenges in hot sectors

Data centres have been a key driver of real estate growth in recent years across most European countries. Against a swell in demand caused by the fast-pace development of generative AI, the Nordics have capitalised benefitting from climates which make all-important cooling more manageable.

As international markets see expanding demand in these growth sectors, the competition for skilled workers will continue to heat up. At an average hourly wage of US$117.9, Switzerland is among the most expensive markets for labour in the world, second only to the US. Costs are particularly high for specialist skills which are in short supply, such as mechanical, electrical engineers, and electrical and plumbing trades.

A similar trend is taking place in the availability of materials, posing a challenge to future growth prospects. Geneva and Zurich are experiencing lead-in times exceeding 41 weeks for key data centre components including switch gear, and half of Europe’s markets captured in our data have similar lead-in times for generators. We continue to advise clients on managing programme risk through direct procurement so their programmes are maintained and insulated from procurement turbulence.

Well-established markets provide fresh opportunities

As overall populations and urbanisation levels continue to rise, pressure is mounting on national and local governments to build more affordable and social homes and regenerate urban environments.

A particularly hot residential market can be seen in Ireland and specifically the capital, Dublin. The Irish government has committed more than €5 billion to accelerate affordable housing delivery in the coming years, as part of a wider drive to build 300,000 new homes across the country by 2030. Average costs to build in Dublin have reached US$3,994 per m².

More broadly, the Continent’s well-established tourist economy is also showing signs of continued strength. The popularity of high-end real estate, from luxury hotels and retail to world-class leisure facilities, in tourism hotspots like Milan, Paris and Vienna continues to drive competition. Despite this, for markets like Paris, costs to build have remained comparatively stable at an average cost of US$3,153 per m² across combined asset types.

A push for reindustrialisation

The NATO summit in June 2025 has offered additional impetus for governments across Europe to turbocharge defence spending in an attempt to scale up military capabilities and bolster national security. We see in Germany, the removal of previous fiscal constraints, including on defence spending, with a fresh commitment to €1 trillion for defence and infrastructure over the next decade.

Demand is heating up in sectors supporting economic and military resilience and self-sufficiency – such as industrial, advanced manufacturing and distribution – particularly across the industrial heartlands of Germany, France and Italy. This, paired with continued growth in data centres and life sciences, is set to stretch capacity.

For markets like Germany, already home to some of Europe’s most expensive cities to build in, keeping costs in check may become more challenging. In Munich, the average cost of construction is currently US$3,868 per m².

Though construction cost inflation in this well-established industrial powerhouse of a country is predicted to fall from 3.4 percent in 2024 to 2.0 percent in 2025, renewed appetite for industrial and defence output is likely to provoke a modest inflationary reaction. We expect cost escalation in Germany to increase an average of 3.0 percent in 2026.

Staying steady and stable

Key to keeping markets attractive is a predictable political and financial environment that encourages and facilitates investment. As the European Commission revisits regulations and directives, whether around data protection or carbon emissions, the objective must be to provide the certainty and consistency which will allow businesses operating across the Continent to grow and invest. A significant reduction in levels of regulation and oversight is expected, which businesses will respond to positively.

For clients, working closely with supply chains at a more local and regional level will help manage risk over time, as nearshoring should provide a more consistent supply of materials and talent. If the industry can get this right, the expected surge in industrial, manufacturing and defence demand can act as a catalyst to support a strengthened construction sector across the continent and unlock new growth, without spiralling costs. This is a tightrope to walk along in these fast-changing geopolitical times.