REGIONAL OVERVIEW
European Union
EUROPE
Growing resilience and strategic demand
Across Europe, construction trends – and costs – are being driven by demand linked to critical growth industries including data centres, advanced manufacturing, defence and nationally significant infrastructure.
For clients, there are significant opportunities, but delivery is becoming more complex as capacity tightens in these sectors. In the meantime, geopolitical uncertainty continues to influence investment and procurement decisions. Success will depend on understanding not just where demand is hottest, but also where labour, power, procurement and supply-chain pressures are most likely to influence delivery.
Across much of Europe, for example, in markets such as Brussels, steadying inflation has improved cost forecasting. This has helped to restore confidence in planning and heat up market activity. Construction cost inflation here has risen by only 0.4 percentage points to 2.7% in 2026 – the average cost to build is US$3,496.7 per m².
Furthermore, several markets across the continent are forecast for a drop in the rate of cost escalation in 2027, as cost of materials continue to broadly stabilise following a minor spike this year.
In the industrial powerhouses of Frankfurt and Hamburg, there is an anticipated fall in construction cost inflation in from 5.0% this year to 3.0 and 3.5%, respectively. Yet beneath this relative stability, delivery conditions remain far from straightforward.
BREAKDOWN DATA
TOP PERFORMING SECTORS
Residential and social housing
Commercial office development
Data centres
Factors influencing delivery decisions
- Specialist labour is under pressure – particularly in high-growth sectors like data centres. Insufficient mechanical, engineering and plumbing capabilities are pulling skilled workers across the continent, creating localised contractor shortages in smaller markets.
- Power and industrial capacity are important differentiators. Increasingly, locations which offer adequate energy infrastructure are better placed to capture investment.
- A focus on resilience. Market strength is concentrating around sectors linked to long-term economic security, digital capability and industrial resilience.
Data centre and industrial demand put pressure on capacity
Data centres are now one of the clearest drivers of construction demand across Europe, particularly in markets with strong connectivity and established digital ecosystems. The data centre market remains the number one sector in terms of activity and is a directly influencing outlooks across the continent.
All four of the European markets reporting increasing competition – Berlin, Dublin, Geneva and Zurich – are well-established data centre hubs. This competitive outlook is notching up building costs in these locations – with the average cost in Geneva at US$6,985.0 per m², the most expensive in Europe.
But their impact goes beyond project volume alone. Data centres are fundamentally reshaping labour markets, supply chains and investment flows across Europe. In many locations, these schemes are redrawing the competitive landscape for subcontractors and specialist suppliers, especially in mechanical, electrical and plumbing trades, as well as extending procurement timelines for vital components like switchgear and generators. This is creating a premium around technically complex delivery, with projects outside the fastest-growing sectors often having to work harder to secure contractor attention and maintain programme certainty.
Advanced manufacturing, logistics and other industrial sectors are reinforcing this trend. Industrial and logistics has climbed from the seventh to third in top regional sector rankings, while defence jumps from 13th to eighth.
Spotlight on ‘west-shoring’
As governments and wider industry respond to geopolitical pressures and continue to build resilience in production and sourcing, Europe is seeing renewed interest in projects that strengthen regional supply chains and reduce reliance on distant manufacturing bases. Nearshoring and increasingly west-shoring – the process of concentrating supply chains and asset building in ‘Western’ and more politically-aligned sub-regions – are driving investment into politically aligned locations with strategic access to key markets and requiring local construction ecosystems to scale up capacity to meet demand.
Understanding where industrial growth is accelerating, and whether local supply chains can support it, is critical for investment planning. The trend is particularly pronounced in southern Europe. Madrid is experiencing surging demand for digital connectivity and data centre projects such as the Grace Hoppe and 2Africa subsea fibre-optic cable systems. This uptick in construction activity is driving inflation in the market, where the average cost to build is now US$3,001.0 per m².
Specialist labour shortages are changing how projects must be procured and delivered
Labour shortages remain one of the most significant factors impacting on Europe’s construction market, even where wider cost escalation has started to moderate. Our survey of 15 markets reveals it is the largest constraint on construction across the region.
The sharpest pressure is in specialist trades tied to highly serviced buildings and advanced industrial projects, where demand is concentrated and technical expectations are high. As data centres, manufacturing schemes and critical infrastructure programmes continue to expand, labour mobility across borders is becoming more important, with capacity increasingly drawn towards the strongest-paying and most complex projects. This leaves other sectors facing tighter availability and a more fragmented supply picture.
That shift is also influencing contractor behaviour. In some European markets, international firms are becoming more selective about the work they pursue, while domestic and regional players are taking on a more prominent role in meeting local demand.
This can broaden routes to delivery, but equally also places greater emphasis on early engagement and realistic procurement strategies. Clients that invest time in building the right partnerships early are likely to be better placed to secure skills, maintain momentum and reduce exposure to disruption later in the programme.
Geopolitical uncertainty is redirecting investment towards resilience, defence and digital capability
Geopolitical uncertainty is influencing Europe’s construction market less by suppressing activity than by reshaping it.
Policymakers are accelerating the move towards prioritising energy security, domestic capability, critical infrastructure and the resilience of supply chains – directly influencing the direction of investment.
Defence-related investment is reshaping debates and decisions on industrial priorities, while projects linked to self-sufficiency and economic security have moved up the agenda.
For example, in Germany – an established car manufacturing powerhouse – three of the four markets surveyed record cooling market activity as fewer new projects start. Munich, as Germany’s leading industrial base, is the most expensive place to build in the country at an average cost of US$4,251.0 per m². Its construction cost inflation is forecast to be the highest in 2027 (at 4.0%); the shifting forecast serving as an indicator of German industry realigning itself to focus on prioritising in-demand sectors.
AI’s promise meets practical constraints
Artificial intelligence is also beginning to shape the regional outlook in two primarily distinct ways:
- It is reinforcing demand for digital infrastructure, with AI-growth adding to the data centre sector itself.
- It is prompting wider discussion about how technology can improve productivity, cost management and decision making in a market still under pressure from skills shortages and a demand to deliver increasingly complex projects.
Adoption remains uneven, however, with concerns around governance, security and digital maturity limiting how quickly AI can be embedded into mainstream delivery:
- 11/15 markets say that AI capabilities is only a slightly more important factor in tendering activity and client discussions - indicating it is emerging but still far away from being very impactful / dominant.
- 10/15 markets surveyed report cyber / information security as either a substantial or major constraint to AI adoption; on average, it is the biggest constraint to AI adoption as a whole.
In the near term, its greatest significance lies in how it sharpens the case for better data, stronger planning and more efficient use of constrained capacity.
AUTHOR
Martin Londra, Head of Real Estate and Major Programmes, Europe
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