As the April 2 deadline for a 25% increase in tariffs on a wide range of imports from Canada, Mexico and China gets closer, industrial and retail property will see the most immediate impacts if consumer spending weakens and the flow of goods shifts, according to a new analysis from CBRE.
“We expect that some large industrial occupiers may delay signing leases in the near term, with third-party logistics (3PL) companies accounting for a larger share of leasing activity as more businesses rely on them amid uncertainty,” the report noted.
It does not expect the recovery in the office market to stall unless there is an economic downturn. It notes that many economists believe the tariffs are likely to slow short-term economic growth and increase inflation, though, in the long term, tariffs may spur some domestic manufacturing.
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The damage caused by tariffs is due to their impact on overall spending power. They will likely be passed on to consumers and the higher costs of goods can make Americans hesitant so spend and slow economic growth. This, in turn, may spur companies to delay leasing commercial property or undertake capital projects. In addition, the cost of borrowing to finance real estate investment rises with higher inflation.
The report cites estimates that tariffs would raise typical household costs in the U.S. by $1,200 a year and increase the cost of buying a car by at least $4,000. “These higher costs are expected to trim about 0.4 percentage points off U.S. GDP growth this year,” the report stated. It added that the Fed’s core Personal Consumption Expenditures index would likely rise 0.4 percentage points more than expected to average 3.1% in 2025. Interest rates would also rise unless held down by a weakening labor market.
In three to five years, domestic manufacturing could add 400,000 jobs in the U.S. – but this figure does not consider the U.S. jobs lost due to lower exports as countries retaliate.
“For the capital markets, government policy uncertainty will drive financial market volatility and weaken business and consumer sentiment. Potentially slower economic growth would also weaken fundamentals across property types, leading to higher vacancy rates, and be a headwind for investment activity. However, this may be partially offset by lower long-term interest rates and cheaper debt costs,” the report stated.
The report cited projections that construction costs for commercial projects could climb by 3% to 5%, based on the 25% tariffs imposed on Canadian and Mexican products and the higher tariffs on Chinese goods. This could cause developers to hold off on some projects.
The report said the effect of the import tax will be felt in CRE more heavily by multifamily than by industrial. However, given the oversupply in some multifamily markets, delays caused by less new supply could give the sector some breathing room.
“But this could eventually lead to supply shortages for certain sectors, such as those emerging for prime office space,” CBRE said. The report also noted that tariffs on Mexico and Canada could slow leasing demand in markets along their borders and key trade routes, varying by location. Tariffs on Chinese goods will affect major U.S. port markets, especially Los Angeles, Long Beach and the Inland Empire.
How the capital markets will be affected is more complex and dependent on the Fed’s actions. If the central bank sees resulting price rises as one-off effects, it might not raise interest rates and could cut them. If it sees the price impacts as long-term, the opposite might happen. Either way, higher prices from tariffs would reduce disposable income, slow economic growth, weaken all commercial property sectors, and reduce capital markets activity due to higher cap rates.
Amid all the unknowns, CBRE said savvy investors could take advantage of the uncertainty to wangle more favorable prices. In the short term, the uncertainty will fuel financial market volatility and dampen business sentiment, leading to less investment.
“However, we still expect a generally supportive backdrop for CRE investment, including continued, albeit slower, economic growth along with at least two Fed rate cuts and a 10-year Treasury yield stabilizing at close to 4%,” the report said.
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