At this point, there’s little surprise that the increased tariffs scheduled to start today will negatively impact commercial real estate. CBRE, CommercialEdge, and S&P Global Ratings have all projected this.
There are obvious concerns such as increased construction costs, additional financial pressure on retailers or multifamily tenants from higher business or living expenses.
“For office conversions, tariffs may add another layer of complexity and cost, potentially making them a financial no-go,” Roger Yang, U.S. industry leader in building, construction, and real estate for KPMG U.S., told GlobeSt.com. “In multifamily housing, tariffs on steel and lumber, coupled with skyrocketing insurance costs from natural disasters in hotspots like the Sunbelt, are a double whammy that can significantly inflate overall project costs.”
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Even in such clear impacts, there can be subtleties. It’s not just framing wood or steel beams or aluminum siding — every pound of nails and screws, every joist bracket costs more. Then there are the slipperier financial impacts, like financing.
“If inflation expectations get too hot, the Fed won’t cut interest rates, and bond markets, which shape the cost of capital for a lot of real estate, are going to go up as well,” Carl Gomez, chief economist and head of market analytics for Canada for CoStar Group, told GlobeSt.com. Financing for CRE projects could get pricier.
Gomez also said that even as costs go up, CRE rents won’t be able to keep up with policy-driven inflation.
“The term premium [which is the difference between the federal funds rate and the 10-year Treasury note yield] has basically gone down to zero,” Gomez added. “If you look at the 10-year treasury, for the past 50 or 60 years, that’s been going down. Now we’re seeing a reversal of that.” The result would increase the 10-year Treasury yield, making CRE financing more expensive.
Tariffs can also provide excuses. It would seem logical to assume that greater materials costs might increase insurance premiums. Candise Shanbron, managing partner of Cernitz Law, which specializes in property insurance claims, agrees that it might seem like that, but things are more complicated.
“You hit a nerve with this topic,” Shanbron told GlobeSt.com.
“The appearance is we need to increase the premiums to offset the construction cost. As long as I’ve been in the insurance industry, replacement cost value has never been this precise science. [Insurance companies] use software to come up with whatever valuation they want to come up with. It’s never ever based on what the policy holder is going to get charged. It’s always been based on this fictitious number. The tariff is just another catalyst for the insurance companies to go, ‘Ah ha, this is just another excuse we have to increase the premiums.’ But at the end of the day, it’s still going to be arbitrary.”
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