The commercial real estate (CRE) construction industry is no stranger to navigating political and economic headwinds, and the prospect of Donald Trump’s proposed tax and trade policies has sparked widespread discussion. These policies—encompassing tariffs, immigration reforms, and potential inflation triggers—raise critical questions about their impact on construction costs, labor availability, and broader market dynamics. While some analysts warn of challenges ahead, others argue that fears of catastrophe may be overblown.
To gauge the potential effects, it’s essential to examine these proposals through the lens of historical precedent, economic trends, and regional nuances within the CRE industry.
The Tariff Dilemma: Rising Costs of Materials
Trump’s proposed 25% tariffs on imports from Canada and Mexico, aimed at combating drug trafficking and curbing migration, could significantly impact the cost of construction materials. Lumber, in particular, is a focal point of concern. Canadian softwood lumber plays a vital role in U.S. construction, especially in suburban multifamily projects where wood framing dominates.
“Suburban multifamily construction projects may be most impacted by tariffs on Canadian imports, given their greater proportion of wood frame deals than urban areas,” says Brian Clement, senior vice president and head of acquisitions at LBX Investments.
However, the current scenario is not without precedent. Tariffs on Canadian softwood are already in place, with duties increasing from 8.05% to 14.54% in August 2024. Despite this, lumber prices—currently $579 per thousand board feet—remain significantly lower than the pandemic-era highs of nearly $1,500. Even with an additional tariff increase, construction costs might rise, but the industry has weathered such challenges before.
The impact of tariffs on other materials, such as steel and aluminum, also deserves attention. Historically, price spikes in these materials have led to delayed projects and thinner profit margins, but the CRE industry has proven resilient in adapting to sourcing alternatives and leveraging advanced construction technologies to mitigate costs.
Immigration Policies and the Labor Puzzle
Labor shortages are an ongoing concern in the construction sector, and Trump’s proposed immigration policies could exacerbate the issue. Immigrants, including those without permanent legal status, form a significant portion of the construction workforce. Estimates suggest that 15% to 25% of the U.S. construction labor pool lacks permanent legal status, with even higher concentrations in Sunbelt markets like Florida, Texas, and California.
“The fact is immigrants contribute significantly to the construction industry and keep costs relatively low,” explains Raul Gastesi, co-founder of the law firm Gastesi Lopez & Mestre. “Reducing the available labor pool for construction will drive up the cost of labor, raising the cost of construction and thereby increasing the cost of purchasing real estate.”
Florida serves as a case study for the potential ripple effects. After Governor Ron DeSantis introduced a law criminalizing assistance to undocumented workers, construction firms in the state faced labor shortages, with some companies relocating operations to Georgia. This highlights the fragility of the labor market in states heavily reliant on immigrant workers.
However, not all sectors of CRE construction would be equally affected. Large-scale projects, which often employ unionized and highly skilled workers, may feel less of an impact compared to smaller residential or renovation projects.
“I think this is a more important topic when it comes to residential construction,” says Michael Vardaro, managing partner at Zetlin & De Chiara. “Large projects typically involve skilled labor and union workers, so the impact might be less pronounced there.”
Inflation and the Fed’s Balancing Act
The intersection of Trump’s policies and inflation presents the murkiest challenge for CRE construction. Lowering taxes for high-income individuals and corporations, coupled with tariffs, could stoke inflationary pressures. If inflation rises, the Federal Reserve may respond with higher interest rates, which directly influence the cost of construction loans and bridge financing.
Historically, the Fed has been cautious about allowing inflation to spiral. The lessons of the pandemic era, when delayed action led to prolonged inflation, suggest that the central bank would act swiftly to keep rates in check. However, even modest rate increases could impact CRE developers who rely heavily on debt financing.
Overblown Fears or Legitimate Concerns?
While the potential challenges are real, some industry experts argue that fears of widespread disruption may be exaggerated. Tariffs and labor shortages are not new phenomena, and the CRE industry has a track record of adaptability. Advanced construction techniques, such as modular building and 3D printing, offer potential cost-saving solutions.
Moreover, regional disparities within the U.S. mean that the impact of these policies will vary. Markets heavily reliant on immigrant labor or specific materials may face greater challenges, while others may see minimal effects.
Justin Zinzow, a Florida-based construction attorney, sums it up: “While it’s a hot-button topic and certainly being discussed in construction and development circles, I don’t think it’s going to have the negative effect that’s being gloated in the mainstream.”
Looking Ahead
Trump’s proposed policies could reshape the CRE construction landscape, but the extent of their impact remains uncertain. Rising material costs, labor shortages, and inflationary pressures are plausible outcomes, yet the industry’s resilience and innovation should not be underestimated.
As developers, investors, and policymakers navigate these challenges, adaptability will be key. Whether through diversifying supply chains, investing in labor training programs, or leveraging technology, the CRE construction industry has tools at its disposal to weather the storm and continue building the future.
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