Starrels: If construction costs increase for a sustained period of time—whether as a result of tariffs or any other external force affecting price—we will see rents and prices escalate. Unfortunately, this will be felt most severely on product types that cater to consumers, and the most precarious of these types is housing. Construction pricing is currently at extremely inflated prices in housing markets with the greatest need for housing—the Los Angeles and San Francisco Bay areas—and tariff-related impacts on construction pricing will only make new housing more expensive. There are few safety valves in housing construction for builders to use in reaction to tariffs—major construction components such as steel, lumber and electrical components are essential to housing construction and all of these have been impacted by tariffs. Unfortunately, if construction costs continue to rise, it will make housing costs more and more expensive and make more difficult the construction of affordable housing. In terms of pure numbers, California as a whole has a shortfall of nearly 3.5 million housing units, and the need is felt most gravely in metropolitan areas like Los Angeles with extreme shortages of affordable housing, especially in areas like the Westside where land values are so high. GlobeSt.com: How are developers responding to these tariffs, and do you have advice for developers that are seeing increased costs as a result? Starrels: In terms of responses by developers, there's no one single reaction. Some projects have slowed, and some developers have changed designs or materials to save costs. Most of my developer clients, however, see the tariff impacts like any other outside force affecting pricing and are not likely to deviate from their market-driven decisions. There is some anecdotal evidence that the upper ends of the housing market have continued unabated despite the cost increases, but I'm not sure that that market confidence translates to all other sectors.

My advice to developers would emphasize the need for careful management of the bidding and construction processes, to identify price increases as quickly and accurately as possible. On large projects, a pre-construction “buy-out” of a development budget can provide a helpful check on estimated construction costs very early in the process, and this information can then be incorporated into feasibility modeling and the construction loan budgeting process. Careful oversight of construction trades by experienced builders will also minimize the impact of price increases to the greatest extent possible, and mechanisms can be deployed to take advantage of ebbs and flows in materials markets where possible. GlobeSt.com: Are certain assets classes more impacted than others? Starrels: Cost increases, especially to construction components as widely essential as lumber, steel and other materials and components, affect all asset classes. The greatest impact will be in the housing sector because the need for all categories of housing is so severe, and because housing construction activity has been sustaining the overall development industry in recent years. The most severely impacted projects will be those that use high quantities of tariff-affected components, high rise construction, for example.

There is some prior history that may be informative to this question. In the past, construction costs were significantly impacted by outside forces – when petroleum prices spiked, for example, developers saw increased costs in construction components that use those materials (which impacted all sectors of development and virtually all types of materials). Similarly, some imported materials became unavailable, and therefore more expensive, when large capital projects in China caused a reduction in exported stone products about 15 years ago, or when quality control issues impacted the import markets for certain materials such as drywall. In both those cases, price fluctuations in important elements of the development process impacted overall project costs. The effect of tariffs on imported materials is potentially even more widespread. And if history is any guide, we simply haven't seen domestic markets for construction components able to pick up the slack in terms of supply of these materials when imported goods are unavailable or more expensive.

GlobeSt.com: How could these tariffs potentially impact consumers or renters?

Starrels: Undeniably, increased construction costs will mean that housing prices, for both renters and owners, will rise Similarly, prices of goods and services for consumers who frequent businesses that must pay higher rents will see those prices impacted as well. In terms of housing, we will likely see continued reliance on expensive high-rise housing product in order for developers to justify higher construction costs, which will further exacerbate the shortage of affordable housing. New high density housing tends to be high-rise, expensive product that utilizes large amounts of steel, and this pattern is exacerbated in transit rich areas where city policies incentivize developers to build affordable housing with density bonuses and increased building permissions. There's no escaping the reality that if construction prices continue to increase, the impact will be felt by consumers.