diff --git a/pw_build/python.gni b/pw_build/python.gni
index aac65ce439..add1d8278f 100644
--- a/pw_build/python.gni
+++ b/pw_build/python.gni
@@ -517,10 +517,12 @@ template("pw_python_package") {
           args = [
             "install",
 
-            # This speeds up pip installs. At this point in the gn build the
-            # virtualenv is already activated so build isolation isn't required.
-            # This requires that pip, setuptools, and wheel packages are
-            # installed.
+            # This speeds up pip installs. Build isolation isn't required for
+            # in-tree packages unless that package includes C/C++ extension
+            # modules:
+            # https://setuptools.pypa.io/en/latest/userguide/ext_modules.html
+            # For packages witout extensions this option requires that pip,
+            # setuptools, and wheel packages are available.
             "--no-build-isolation",
           ]
 
diff --git a/pw_build/python_venv.gni b/pw_build/python_venv.gni
index 1391194ef5..dfb0dd2a81 100644
--- a/pw_build/python_venv.gni
+++ b/pw_build/python_venv.gni
@@ -168,7 +168,6 @@ template("pw_python_venv") {
         _skip_installing_external_python_deps = true
         args = [
           "install",
-          "--no-build-isolation",
           "wheel",
         ]
         inputs = _constraints
@@ -190,10 +189,11 @@ template("pw_python_venv") {
         module = "pip"
         _pw_internal_run_in_venv = true
         _skip_installing_external_python_deps = true
-        args = [
-          "install",
-          "--no-build-isolation",
-        ]
+        args = [ "install" ]
+
+        # Note: --no-build-isolation should be avoided for installing 3rd party
+        # Python packages that use C/C++ extension modules.
+        # https://setuptools.pypa.io/en/latest/userguide/ext_modules.html
         inputs = _constraints + _requirements
 
         # Constraints
diff --git a/pw_env_setup/py/pw_env_setup/virtualenv_setup/install.py b/pw_env_setup/py/pw_env_setup/virtualenv_setup/install.py
index 2abba5d3bf..95d6421d82 100644
--- a/pw_env_setup/py/pw_env_setup/virtualenv_setup/install.py
+++ b/pw_env_setup/py/pw_env_setup/virtualenv_setup/install.py
@@ -264,7 +264,10 @@ def pip_install(*args):
         requirements = constraints
 
     if requirements:
-        requirement_args = ['--no-build-isolation']
+        requirement_args = []
+        # Note: --no-build-isolation should be avoided for installing 3rd party
+        # Python packages that use C/C++ extension modules.
+        # https://setuptools.pypa.io/en/latest/userguide/ext_modules.html
         requirement_args.extend('--requirement={}'.format(req)
                                 for req in requirements)
         combined_requirement_args = requirement_args + constraint_args