Arcadis flags strain in construction recovery

Australia’s construction sector is facing a critical juncture in 2025, according to the Arcadis Half-Year Construction Market View, which outlines a landscape marked by opportunity and constraint.

While national GDP is expected to grow by 1.5 per cent in both 2025 and 2026, the construction industry is lagging – held back by persistent labour shortages, rising insolvencies and structural inefficiencies. Still, a strengthening pipeline of public infrastructure, momentum in renewable energy, and improving sentiment in parts of the country offer cautious optimism.

The sector is grappling with a shortfall of 90,000 to 130,000 workers, which is fuelling wage growth and intensifying competition for skilled labour. Insolvencies are also eroding delivery capacity. Meanwhile, the private sector remains constrained by affordability challenges and project viability concerns – mirroring the fragmented recoveries seen in markets like the UK.

A shift in national policy settings following the federal election has introduced new pressures and potential. With Labor re-elected on a platform of housing affordability, defence investment and regulatory reform, new demand drivers are entering the market. These include the $10 billion Housing Australia Future Fund, an expanded Help-to-Buy scheme, and increased defence spending. But the capacity to meet this demand depends on addressing entrenched delivery issues.

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“While sentiment across the [construction] sector is improving and project pipelines are solidifying, labour shortages and cost pressures continue to bite,” said Matthew Mackey, executive director, cost and commercial management at Arcadis.

“The challenge now is converting optimism into delivery, through innovation, workforce planning and genuine collaboration. Government stimulus is a welcome tailwind, but without targeted action on skills and delivery models, policy ambition risks outpacing what the industry can deliver.”

Sydney

Sydney remains the country’s most expensive construction market, though cost escalation eased to 5.1 per cent in 2024 – in line with Arcadis’ forecast. Strong public investment continues to drive activity, with $13.4 billion committed to health projects and $2.4 billion to education.

Private activity is subdued, but efforts to expand housing supply are beginning to take hold. Build-to-rent and affordable housing projects are gaining traction, though delivery remains behind state and federal targets.

Arcadis forecasts building escalation will moderate to 4.6 per cent in 2025 and 4.5 per cent in 2026, with cumulative inflation reaching 27.9 per cent over the five years to 2029. Public spending and housing initiatives are expected to provide a stable base of activity, even as competition for labour persists and contractors sharpen pricing to secure work.

“Sydney’s construction market is showing signs of resilience, with public investment and new delivery models helping to steady the ship,” said Mackey. “However, persistent capacity constraints and the need for more affordable housing underline the importance of targeted reforms.”

Melbourne

Melbourne’s construction market remains under pressure. Building cost inflation hit 5.5 per cent in 2024, well above the previous forecast of 3.2 per cent. Arcadis expects the city to record the lowest cumulative inflation of the major capitals – 25.5 per cent through to 2029 – signalling a softer outlook.

Government investment has slowed, and private sector activity remains weak amid labour disputes and challenging commercial conditions. In 2024, the city recorded more than 600 construction insolvencies – nearly a third of the national total. Office vacancy has climbed to a record 18 per cent, intensifying stress on developers and landlords.

Nonetheless, green shoots are emerging. Labour costs are forecast to rise 5 per cent annually over the next four years, and government plans to deliver 60,000 new homes in designated activity centres by 2051 could re-energise the residential sector – though community resistance and planning complexity remain hurdles.

“Melbourne has endured the perfect storm of a subdued private sector and an uncertain public infrastructure pipeline, with slow progress on planned education projects and the Suburban Rail Loop,” said Mackey. “However, stabilising costs and new opportunities in high-density residential development provide reasons for cautious optimism. The key will be restoring confidence and unlocking opportunities.”

Brisbane

Building cost escalation in Brisbane reached 5.2 per cent in 2024, just below the earlier 6 per cent forecast. A slower-than-expected start to Olympic infrastructure has contributed to this moderation, but cost pressures are expected to return as those projects ramp up. Arcadis projects 5 per cent escalation in 2025, with cumulative building cost inflation of 30.5 per cent through to 2029.

Labour shortages are acute, with a shortfall of more than 41,000 workers recorded in early 2025. Wage growth is being fuelled by Enterprise Bargaining Agreements, while delivery delays are affecting major projects. In response, contractors are trialling new delivery models – such as profit and risk-sharing – to manage feasibility risks.

Housing delivery continues to trail behind targets, while the commercial market is facing tightening supply of premium office space and uncertainty around future development.

“It’s promising to have a line of sight for the Olympics, with a city-shaping narrative for projects helping boost confidence among developers and contractors. However, we need to act quickly to ensure projects can be completed in time,” said Mackey. “Government has put in place the legislation to pave the way for planning, but it remains unclear how the work is going to go to market.”

Perth

Perth stands out for its construction growth, recording a 12.2 per cent increase in work done in 2024. Building cost escalation reached 10.4 per cent – slightly below the 11.1 per cent forecast but still double that of the other capitals. Strong population growth, low unemployment and high retail spending are underpinning demand.

Government projects, including the $1.8 billion Women and Babies Hospital and a $75 million build-to-rent fund, are boosting activity. Despite an uptick in rental vacancies to 2 per cent, housing supply remains tight.

Arcadis expects building cost inflation to moderate over the medium term, falling to 8.5 per cent in 2025 and 4.5 per cent by 2028. Still, cumulative cost growth of 42.4 per cent over five years highlights the intensity of demand in the market.

“Perth is an isolated market, meaning it’s either feast or famine,” said Mackey. “A strong economy and proactive policy support has turbocharged development, saturating the market, and without access to labour from neighbouring cities, construction growth has surged, even as the sector works to overcome labour and housing supply challenges. Continued innovation will be key to sustaining this momentum.”

Click here to download the full Arcadis Half-Year Construction Market View report.