Winners and Losers in the Tariff War

February 5, 2025

How Will Tariffs Reshape the U.S. CRE Market?

We are barely a month into 2025 and already one item on our Watchlist of 12 Black Swans for CRE has arrived. The Trump administration’s aggressive stance on import tariffs with key trading partners is poised to scramble U.S. CRE markets. With rising construction costs, potential inflationary pressures, interest rate impacts, and evolving foreign investment trends, the market will need to adapt. Here is what we can expect if these tariffs take hold.

Rising Construction Costs and Supply Constraints

One of the most immediate effects of tariffs will be higher development costs for new projects. The U.S. construction industry heavily depends on imported building materials, with China, Canada, and Mexico being key suppliers. China exports essential materials such as steel, aluminum, flooring, fasteners, mechanical components, glass, and plumbing fixtures. Canada is a primary source of softwood lumber, a crucial material for residential and commercial construction. Mexico supplies cement, steel, glass, and electrical components, all vital for infrastructure and development projects.

The Trump administration’s proposed 25% tariff on Canadian and Mexican imports, along with a 10% tariff on Chinese imports, is expected to drive up costs for developers. In particular, higher tariffs on Chinese steel and aluminum will increase structural material costs, while tariffs on Canadian lumber will impact framing and finishing costs. Additionally, any trade disruptions with Mexico could further strain budgets by limiting access to affordable cement, steel, and glass.

Higher costs may slow new development, particularly in markets where tight margins make projects less viable. This could benefit existing property owners by reducing the pace of new supply, keeping occupancy rates and rental prices stable or rising in select markets.

Inflation and Interest Rates: A Hedge for CRE?

As tariffs drive up costs across industries, inflation could rise. While this may lead to higher interest rates and borrowing costs, commercial real estate could also benefit as an inflation hedge. Historically, real estate has been a preferred asset during inflationary periods due to its ability to generate rising income streams.

If inflation pushes up rents and property incomes, CRE could become even more attractive to investors seeking stability in a rising-price environment. While borrowing costs may increase, the inflationary boost to property revenues could offset the negative impact of higher cap rates. Investors looking for inflation protection may allocate more capital to real estate, reinforcing demand for well-positioned assets.

Foreign Investment: Politically Driven Capital Flow Disruptions

Foreign capital has historically played a significant role in U.S. CRE, particularly in major gateway markets such as New York, Los Angeles, and Miami. However, the expected pullback in foreign investment will be due less to perceived risks in U.S. real estate but rather the result of political restrictions imposed by foreign governments and trade policies.

• Government-Imposed Restrictions: Chinese investors, long active in U.S. office and multifamily real estate, may be forced to scale back investments due to capital controls and government-imposed restrictions, rather than concerns about market stability. Other nations with stringent capital control policies could similarly see reduced outbound investment into the U.S.
  
• Safe-Haven Appeal: Despite political restrictions in some regions, U.S. real estate remains an attractive asset for capital preservation. Investors from politically stable countries, such as Canada and European nations, may see opportunities to increase their exposure in sectors that are less vulnerable to trade policy disruptions.

Industrial and Retail: Winners and Losers

The industrial sector could see gains as companies nearshore operations to mitigate trade risks. Increased U.S.-based production could drive demand for warehouse and manufacturing space, particularly in logistics hubs. However, a slowdown in imports due to tariffs could disrupt logistics and distribution networks, potentially leading to weaker demand for port-adjacent and cross-border distribution centers. Additionally, uncertainty in long-term trade agreements may cause some hesitation in large-scale expansion.

Retailers reliant on Chinese imports for apparel, electronics, and home goods will likely experience margin pressure. Some may scale back their physical footprint, leading to higher vacancies and softer leasing activity in certain markets.

What Lies Ahead?

The ultimate impact of tariffs on U.S. CRE will depend on whether they are implemented, how long they remain in place, and broader economic changes. If inflation accelerates, real estate could solidify its role as a preferred asset class for investors seeking protection against rising prices. The interplay between supply chain shifts, capital flows, and construction costs will scramble the market, creating both challenges and opportunities.

In an uncertain landscape, those who stay ahead of changing market dynamics and adjust their investment approaches accordingly will be best positioned to thrive. Tariffs may create short-term disruptions, but they could also reinforce the long-term value of commercial real estate as an adaptable, income-generating asset class.