Stay Informed: How Tariffs are Impacting Real Estate

As the new administration continues negotiating tariffs with other countries, most industries prepare for potential opportunities and obstacles. With the changing marketplace, it’s common to be fearful of the unknown or unexpected. This fear is already prevalent within the real estate industry, as some tenants are beginning to pause new leases. Rather than halting operations or making uninformed decisions, stay current with the latest insights and analysis on proposed tariffs.  

Governmental Real Estate Shifts  

As businesses and industries nationwide look closer at their financials and real estate, many are proactively starting to consolidate locations, and the federal government is no exception. The federal government has a 460 million-square-foot office footprint that is underutilized. With 24 federal agencies, 70% of agencies estimated that they utilize 25% or less of their office’s capacity. Given the current administration’s stated goal of reducing employment and cutting waste, reducing the government’s real estate footprint could increase office vacancy rates. Washington, D.C., saw a slight quarter-over-quarter decline in volume, likely due to the federal workforce reduction in efforts to consolidate real estate.  

Tariffs on the Real Estate Industry as a Whole 

With continued economic uncertainty and potential rising costs, many are beginning to reevaluate business goals, operations, and spending habits. Recently, several economists raised their outlook for the odds of a recession this year to 60%, increasing fears and common concerns. Because of this, the real estate industry could experience a lull until the market stabilizes, as an uncertain economy could lead to fewer willing buyers. This directly correlates with other real estate endeavors and overall property value, as falling sales would inevitably lead to falling home values.  

Industrial and Retail Leasing  

Although the real estate industry could suffer, the industrial and retail leasing sector will experience the most direct hit. If consumer spending or the flow of goods gets disrupted, businesses might face foreclosure due to substantial drops in inventory and profitability. In fact, “REIT management teams in the industrial space report that some tenants are already beginning to pause on new leases. However, they indicated a trade war will ultimately spur demand for its properties.” This makes it imperative for those in the industrial and retail space to be informed on tariffs, enhancing decision-making capabilities during this time of uncertainty.  

Manufacturing  

Many projects are coming to a halt due to potential material increases. It’s projected that U.S. manufacturers could likely meet 75% or more of the material needs on a typical construction project. A tariff averaging 20 % could raise direct costs by 4 to 8 percent for the remaining materials that would have to be imported. This would drastically impact budgeting, possibly creating a financial burden, which is why many are currently wary of starting new projects.  

Industrial Construction 

As proposed tariffs on materials threaten to raise building and development costs, the industrial sector is already facing record-low levels of construction. These tariffs hurt industrial construction and increase the prices of other components, such as electric and infrastructure materials, from Canada and China. Common materials include:  

• Canadian lumber
• Steel 
• Concrete 
• Glass 
• Finishing products  

Potential Positive Effects of Tariffs on the Real Estate Industry 

Although the tariffs seem to do more harm than good for the industry, they could spark several benefits. The saying, “necessity is the mother of invention,” is applicable in this situation as tariffs could play a pivotal role in reshaping the manufacturing sector. If they prompt producers to refocus efforts on U.S. goods and services, there would be an increased internal reliance and production efforts. Additionally, tariffs may boost domestic manufacturing capacity, particularly in certain industrial sectors such as:  

• Automobiles
• Shipbuilding
• Pharmaceuticals
• Technology products
• Machine tools
• Fabricated metals 

With rising costs associated with outsourcing goods and services, companies could shift from importing goods to reshoring operations in facilities near major ports. This would reinforce regions like Southern California and Southern Louisiana as logistics hubs, ultimately optimizing supply chains. Increased investments in automation and the reshoring of trillions of manufacturing dollars will benefit all commercial real estate aspects.  

What’s Next?  

With economic uncertainty, it’s normal to be apprehensive or have questions. Whether you are figuring out how to restructure operations and business plans or are worried about potential financial implications, EisnerAmper has your back. With decades of experience, our team has extensive knowledge and resources to help your business succeed. Find comfort in knowledge and contact us below for trusted insights and solutions.