Construction industry
Construction industry
Overview
Europe’s construction industry is positioned for a stronger rebound in 2026, driven by ongoing public sector investment and demand for digital infrastructure accelerating. Although labour shortages and cost pressures persist, strategic investment in sustainability and energy efficiency is creating long-term opportunities. With policy support and a renewed focus on carbon compliance, the outlook for 2026 is increasingly positive.
Over 2025, the European construction industry navigated a year of contrasts and complexity. Political and economic headwinds slowed progress in some markets, while others showed signs of recovery. Public investment in infrastructure, energy, and utilities continued to provide stability, and demand for data centres remained a strong growth driver. Sustainability stayed at the forefront, with retrofitting and refurbishment gaining momentum.
Life sciences and pharmaceutical projects required a shift in approach as teams managed the impact of ongoing tariff announcements. Despite these challenges, the sector demonstrated resilience, adapting strategies to maintain delivery and protect value. Insolvencies and geopolitical uncertainty persisted, but the industry’s ability to adjust and innovate under pressure reflects a cautious yet positive outlook for the year ahead.
Niall Greene Senior Director, Europe
The Nordics are emerging as a key growth engine, with data centre investment and renewable energy driving construction activity despite wider regional headwinds.
Construction industry output
Europe’s construction industry is edging into recovery. A projected 0.3% rise in 2025 may be modest, but it marks a turning point after the previous year’s decline. Momentum is building in infrastructure, data centres, energy, and utilities, all buoyed by steady investment and policy support. Yet, challenges persist, from labour shortages to volatile material prices.
2025
- Ireland is expected to have posted the highest growth, with output rising by 6.5%. This was driven by investment in renewable energy, transport infrastructure, and housing. While the data centre pipeline is strong, estimated at €10bn, access to power remains the biggest challenge for delivery. Spain follows with an anticipated 4% growth, supported by residential, renewable energy, transport, and industrial infrastructure.
- The UK’s construction output is projected to have grown by 1.6% in real terms, supported by renewed investment in housing and commercial sectors as interest rates ease. The data centre sector continues to gain momentum, with recent announcements focused on AI infrastructure. Insolvencies remain a concern, though there was a slight improvement in the first half of 2025, with a 0.5% YoY decline. Institutional projects are expected to move faster, with the NHS launching a new initiative to expand modular building frameworks.
- Construction output in the Netherlands is expected to have grown by 1.7%, supported by government-backed renewable energy projects under the April 2025 climate package. Belgium’s output is projected to have grown by 0.5%, supported by public investment under the 2025 Federal budget and emerging private investment in data centres and pharmaceutical manufacturing. However, construction bankruptcies rose by 10.4% YoY in H1 2025.
- Italy is forecasted to have contracted by 0.8%, mainly due to tariff-related challenges in its export-driven economy. However, infrastructure, energy, and utilities are expected have grown by more than 5%.
- Germany continues to face headwinds. Germany’s construction output is expected to have contracted by 3%, marking the fifth consecutive year of decline. Weak investment sentiment subdued residential and industrial activity, and an unfavourable economic climate continue to weigh on the industry. Despite this, the data centre market remains active. Investment in this area helped lift the commercial construction index order value by 2.5% in H1 2025, recovering from a 5.5% annual drop in 2024, primarily due to weakness in the office segment.
- France faces similar challenges. With a notable government deficit, construction output is expected to have contracted by 1.3% in 2025. However, industrial, infrastructure, energy, and utility sectors have remained stable, with an expected growth between 1% and 2% in 2025. Investment in data centres is also expected to continue.
- In the Nordics, Finland is the only country expected to post positive growth of 2.6%, driven by investments in renewable energy, mission-critical sectors, housing, and infrastructure. Meanwhile, Denmark, Sweden, and Norway are expected to contract by 2 to 3% mainly due to reduced residential activity and weak investor confidence. However, interest in data centre development is rising across the region, with the Nordics now accounting for 15% of Europe’s data centre project pipeline by value.
- Outside the EU, Israel's output is expected to surge by 12.9%, driven by high-tech and residential demand, and low base effect.¹
What lies ahead for 2026
- The outlook for Europe’s construction industry in 2026 is cautiously optimistic. Growth is expected to continue across key European markets, including Spain, Ireland, the UK, and the Nordic countries. Countries that have previously experienced contraction, including Germany, and France, are forecast to return to growth. Between 2026 and 2028, the average growth rate in these countries is expected to be around 3 to 4%.
- The growth will be primarily led by public sector projects in affordable housing, infrastructure, energy, and utilities, supported by the EU’s green and digital transition goals and the €807bn Recovery and Resilience Facility (RRF).²
- Amid these sectoral shifts, data centres remain a key growth driver, with a pipeline valued at over €310bn. This includes announced and under construction projects. Alongside new builds, retrofitting and upgrading existing facilities is gaining traction, especially as operators focus on increased capacity and long-term sustainability. Power remains a critical bottleneck, though efforts are underway to improve grid infrastructure.
- National and EU-level efforts to build climate-resilient infrastructure are also accelerating. The revised 'Construction Products Regulation' is pushing for broader use of sustainable materials to boost competitiveness, and Nordic countries are leading in recycling and waste reduction efforts. Defence-related construction may also provide a short-term boost.
- The EU’s new life sciences strategy, backed by over €10bn annually, is expected to unlock further opportunities in research, manufacturing, and logistics infrastructure development.
- However, challenges remain. Skilled labour shortages and elevated material costs, continue to put pressure on project delivery.
- In short, 2026 will be a year of steady recovery. Strategic investment will be driven by sustainability, digital infrastructure, public and private sector demand.
Construction inflation
Construction inflation across Europe moderated in 2025 and is expected to remain stable in most countries through 2026.
- The EU tariff agreement has brought some stability to the industry. However, global tariffs, ongoing geopolitical uncertainty, and weak economic conditions still present risks.
- Material price trends were mixed with copper and aluminium remaining volatile, while steel prices declined, and stainless steel, now critical for liquid-cooled data centres, also showed downward movement.
- Cement prices remained elevated, with slight increases, and compliance costs linked to the Carbon Border Adjustment Mechanism (CBAM) and the Emissions Trading System (ETS) may rise from 2026, though weak demand could offset some of the pressure.
- Diesel prices fell amid global oversupply, helping to ease overall inflation.¹
- Labour cost inflation stabilised in some countries as residential construction remained weak, but skills shortages for mission-critical projects continue to drive tender price pressures.
- Infrastructure and data centre sectors sustain demand for specialised contractors and skilled labour, with AI-related data centre projects commanding a premium.
- Sustainability mandates and carbon compliance requirements are raising specification standards and are likely to add cost to new projects.
- Even though overall inflation is easing, ongoing issues such as labour shortages, environmental rules, and sustainability requirements will keep pushing construction costs up into 2026.
Supply chain outlook
Review of 2025
- Market conditions in Europe showed signs of stabilisation, supported by easing prices for some commodities and stronger competition in the supply chain. These factors led to better unit pricing and shorter lead times.
- Supply chain costs stayed within the projected 2–5% annual increase, driven by higher labour, energy, and production expenses. Lead times for mechanical, electrical, and cooling equipment improved by 8-10 weeks YoY, supported by stronger supplier responsiveness, framework agreements, and prioritised production schedules. This enabled faster procurement and delivery.
- However, geopolitical tensions and tariffs continued to dampen confidence. Freight and logistics remain under pressure from port disruption, labour disputes, and trade protectionism. Security risks along key trade routes, including the Red Sea and the Suez Canal, have forced vessels to reroute, adding delays and costs.
- Strengthening supplier relationships and securing long-term contracts are critical to stabilising supply chains. These measures support pre-purchasing and reserve production capacity.
- Demand for high-performance computing and AI infrastructure continues to drive growth in data centre cooling. Liquid cooling systems now account for about 40% of new installations, reflecting the focus on energy efficiency and reliability in next-generation facilities
Outlook for 2026
- Data centre construction will continue to stretch supply chains, especially for power and cooling systems. Long-lead items such as transformers and generators will remain scarce, compounded by overlapping demand from renewable energy projects and AI infrastructure.
- Resource-related delays will be a leading cause of schedule slippage and cost overruns. Early supplier engagement and clear visibility of lead times are essential.
- Companies will focus on stronger vendor relationships, better forecasting, and, where feasible, localisation of supply chains. Diversifying vendors and exploring tariff-exempt sourcing options will help mitigate risk.
- Accurate demand forecasting is critical. Inaccuracies can lead to overproduction or shortages, causing surplus inventory, wasted resources, and missed schedules.
- Retrofit demand will remain strong as operators upgrade legacy infrastructure for AI workloads and sustainability goals. Modular solutions and off-site fabrication will reduce disruption and accelerate delivery.
- Sustainability remains a key focus across the data centre industry. Adoption of low-emission fuels such as hydrotreated vegetable oil (HVO), energy-efficient cooling technologies like liquid cooling, and circular-economy practices, including reverse logistics, is helping reduce emissions and strengthen long-term supply chain resilience.
- Lead times are expected to continue improving as suppliers expand capacity and adopt strategies to avoid tariffs. However, global tariffs and geopolitical uncertainty remain key risks.
*Generator availability depends on engine size. For example, units in the 2MW–2.5MW range are more readily available, whereas those in the 3.5MW–4MW range are less common and considered specialized.
**Lead times can vary depending on the size of the bio-reactor, though they are generally stable at present.
The timelines provided are based on specific specifications and brands, as reported in Q3 2025, and reflect market conditions at that time. Therefore, the timelines mentioned above are indicative and subject to change.
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