Tariffs, Immigration Policy Could Further Slow CRE Development
Recently enacted policies are likely to impact the performance of commercial real estate over the next few years, as increased construction costs restrain new supply.
“When you get down to it, forecasting commercial real estate fundamentally boils down to basic economics, supply and demand,” said John Chang, chief intelligence and analytics officer at Marcus & Millichap. “Of course, there are a lot of nuances when you drill down, but if the macro supply and demand forces are favorable, it's a tide that can pretty much lift all boats, and many of the new policies will have a significant impact on the new supply of commercial real estate.”
Real estate construction had already begun slowing across most sectors last year as the cost of construction financing was elevated and some property types, including multifamily and industrial, were already hitting a new development saturation point, said Chang. President Trump’s tariff and immigration policies could further slow construction.
Factoring in the announced 30% tariffs on the European Union and Mexico, the net effective tariff rate is about 20%, which means a lot of the materials needed to build CRE properties are going to cost more. Steel and aluminum tariffs increased to 25% in March and 50% in June. The U.S. imports about 25% of the steel and about 57% of the aluminum used in construction. A 50% tariff on copper is effective as of August 1. The U.S. imports 51% of its copper supply.
The administration is also evaluating increased tariffs on Canadian lumber from about 15% to 27%. Canada accounts for about 24% of U.S. softwood lumber, and an increased tariff would likely weigh on garden-style multifamily construction, said Chang.
These increased duties will raise prices across the board for construction materials, including steel I-beams, copper wiring and aluminum framing.
Stricter enforcement of immigration policy is also likely to shrink the available construction labor pool, increase labor costs and restrain new development, said Chang. At least 34% of U.S. construction workers are foreign-born, and specialized jobs like painting, roofing, drywall and flooring installation rely heavily on immigrant labor.
“More stringent immigration enforcement and the potential chilling effect that will have on legal immigration to the United States will tighten the construction labor pool that could increase labor costs and further restrain commercial real estate development,” said Chang. “Since 2020, construction labor costs have increased by 27% to nearly $40 per hour, and these costs will likely increase further under the new policies.”
Higher material costs and labor shortages will combine to drive up construction costs and slow the pace of new development, a trend that was already taking place, noted Chang. Apartment starts are down 77% from their 2022 peak, and units under construction are down 51%. Only 28 million square feet of retail space is expected to be delivered this year, and construction spending in the sector is down 28% since the third quarter of 2023.
In the office sector, 54 million square feet of space is expected to come online this year, mostly build-to-suit projects. And in the industrial sector, 250 million square feet are scheduled to be delivered this year, with construction spending down 35% since mid-2023, said Chang.
As supply slows and a supply/demand imbalance emerges, vacancy rates are likely to tighten and rents could increase. This scenario presents opportunities for investors alert to these shifts, said Chang.
Source: GlobeSt/ALM