Key Takeaways
- Tariffs on steel, aluminum, copper, lumber, and appliances have raised construction and development costs sharply.
- Increased material costs lead to project delays, budget overruns, and reduced feasibility, especially for workforce and value-add housing.
- Developers pass these costs to buyers and renters, pushing home prices and rents higher in supply-constrained markets.
- Many investors focus on stabilizing existing assets, favor multifamily properties, and use DSTs or REITs to mitigate development risk.
- Volatility reshapes capital flows, making diversification and agility crucial for capitalizing on market opportunities.
Recent Tariff Actions and Their Scope
In June 2025, tariffs on imported steel and aluminum doubled to 50%, affecting key construction materials like framing, roofing, electrical systems, and appliances. By August, the Trump administration imposed additional tariffs on imports from over 60 countries, including lumber (35% from Canada) and high tariffs of up to 50% from Brazil and India. The average U.S. tariff rate jumped from 2.3% in late 2024 to 15.8% in 2025, reflecting a more assertive trade stance.
Impact on Construction and Development Costs
Tariffs on building materials (e.g., steel, aluminum, lumber alternatives) can raise development costs for residential, commercial, and industrial projects. Roughly 7% of materials used in U.S. residential construction are imported and especially vulnerable to these tariffs, leading to:
- Higher cost per square foot
- Delayed construction timelines due to sourcing constraints
- Budget overruns, risking project cancellations or postponements
Effect on Property Values and Rents
Limited new supply, due to higher building costs and slower development, supports existing property values in high-demand areas. Rent growth is rising in markets with constrained housing supply, benefiting investors focused on multifamily assets. However, higher input costs can dampen expected returns and reduce investor enthusiasm.
Commercial Real Estate Investor Considerations
These tariff changes are having an effect on commercial real estate (CRE). Unlike late 2024, when CRE transaction activity began to rebound, there was a slowdown of activity during the first two quarters of 2025. Whether these figures remain consistent or improve through late 2025 remains to be seen and requires careful attention.
For investors, key strategic responses include:
- Prioritizing stabilized assets to preserve cash flow and hedge against rising construction and replacement costs.
- Leveraging passive real estate structures—such as DSTs or REITs—to gain diversified exposure to professionally managed, income-generating properties without taking on the risks of new development or direct management.
- Focusing on sectors with resilient demand, such as senior housing and necessity-based commercial, where rent growth can help offset inflationary pressures.
A combination of strategic risk management and diversified sourcing helps CRE investors maintain portfolio growth.
Market Sentiment and Economic Impact
CRE investors monitor not just costs, but also broader shifts in consumer and investor behavior. Tariffs often contribute to macroeconomic uncertainty, which can impact:
- Interest rate policy
- Institutional investment flows
- Market confidence
This environment creates both risks and potential opportunities, underscoring the importance of diversification and flexibility for real estate investors.
Stay Informed and Strategically Positioned
While tariffs elevate construction costs and introduce uncertainty, they also reshape real estate investment strategies—rewarding those who balance risk management, diversification, and long-term planning. For investors interested in tax-efficient, passive real estate investments that may help navigate these challenges, consider opening a free investor account with 1031 Crowdfunding to explore current offerings.
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