Lay Summary center dot Over the past century, woody plants have invaded grasslands worldwide, altering markedly the quantity and quality of habitat for grassland specialists. center dot Although the process of woody plant encroachment is especially prevalent in desert grasslands, little is known about how it affects birds that breed in these ecosystems, which can hinder efforts to restore habitat for imperiled species. center dot From 2013 to 2015, we surveyed breeding birds and monitored their nests on 140 plots in desert grasslands of Arizona that spanned the full range of woody cover in the region (0-37%). center dot Woody plant encroachment altered densities of all breeding bird species; densities of 3 of 4 common obligate grassland specialists decreased by >= 50% in areas where woody cover surpassed 15%. center dot Although woody plant encroachment decreased the amount of nesting habitat available for grassland specialists, encroachment did not influence nest survival of most species. Only Grasshopper Sparrow (Ammodramus savannarum) was affected at multiple spatial scales, with nest survival decreasing sharply as woody cover increased. center dot Because populations of most grassland specialists are adversely affected during even the earliest stages of encroachment, conservation efforts will be most effective when enacted preemptively, focusing on protecting grasslands that have not yet been encroached by shrubs and by removing shrubs before they mature and become difficult to control. Woody plants are proliferating in grassland ecosystems worldwide, altering distributions and demography of many imperiled species. The transition from grassland to shrubland is especially prevalent in semiarid regions, but the influence of woody plant encroachment (WPE) on birds that breed in desert grasslands is poorly understood, which reduces the potential for developing effective conservation actions for this imperiled group. During 2013-2015, we surveyed breeding birds on 140 10-ha plots in southeastern Arizona, USA, that spanned a gradient of encroachment (0-37% cover) by Prosopis (mesquite), which has invaded grasslands worldwide. We evaluated the effect of WPE on density, nest placement, and nest survival at 3 spatial scales (within 1.5 m and 5 m of the nest and at the 10-ha plot) for common species and 3 species groups: obligate grassland specialists (n = 7 species), facultative grassland specialists (n = 17), and species not typically associated with grasslands (n = 42). Density of the obligate species group decreased by 30% across the gradient of shrub (0.5-2 m tall) cover and by 23% across the gradient of tree (>2 m tall) cover. For 3 of 4 obligate species, density decreased by >= 50% when tree cover increased from 0 to 15%. In contrast, density of the facultative species group nearly tripled as tree cover increased from 0 to 22%. Obligate species placed nests 3.5 times farther from trees than facultative species (51.9 vs. 14.8 m). WPE influenced nest survival for 2 species but effects were inconsistent across spatial scales: nest survival of Grasshopper Sparrow (Ammodramus savannarum) decreased with increasing cover of trees on plots and shrubs within 5 m of the nest, and nest survival of Mourning Dove (Zenaida macroura) increased with increasing cover of shrubs on plots. Our results demonstrate that many grassland obligates are affected adversely even by small increases in woody cover. Consequently, restoration efforts should focus on early stages of WPE (i.e., cover <10% and shrubs <2 m tall) when removal of woody plants is more effective and less expensive relative to later stages.