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Real estate companies may not be the first casualties of a trade war, but they won’t emerge unscathed. With new tariffs on key building materials and potential retaliatory measures from major trade partners, the sector must prepare for rising costs, prolonged project timelines, and economic volatility. In an environment where financial resilience is paramount, boards must take a proactive approach to mitigating risks and positioning their companies for long-term success or else be caught flat-footed in a shifting global economy.
Key Takeaways
- A trade war – or at least the threat of one – is materializing rapidly.
- A trade war will significantly affect real estate, impacting input costs, supply chains, and tenant economics.
- Real estate companies must prepare for a new economic environment where construction costs are higher, supply chains more fragile, and distressed assets may be the norm.
The Trump administration has imposed tariffs on the U.S.’s three largest trading partners – Mexico, Canada, and China – and swift retaliatory tariffs are being levied in return. Although there have already been delays to the tariffs being proposed, it is clear that a trade war – or at least the threat of one – is brewing. From the perspective of real estate companies, the difference between an actual trade war or just the persistent threat of one may be negligible. Either way, the real estate sector needs to prepare for a new economic environment.
How a Trade War Could Hit Real Estate
1. Rising Construction Costs and Development Delays. The real estate sector remains highly dependent on imported construction materials, including steel, aluminum, lumber, and other components and machinery. Indeed, in recent years, the U.S. imported nearly $70B worth of these building components from China, Canada, and Mexico alone. With tariffs as high as 40-50% being considered on some of these goods, the cost of building materials is likely to rise significantly for developers and contractors, making new projects more expensive to execute. For an industry that is still in the process of recovering from the fallout of the pandemic and rising interest rates, the impact could be particularly severe, forcing companies to either absorb higher costs, renegotiate contracts, or delay construction. In some cases, these rising costs could render certain projects financially unfeasible, leading to a slowdown in new development.
2. Supply Chains Move From “Just in Time” to “Just in Case” Beyond material costs, supply chain disruptions caused by trade restrictions could create logistical bottlenecks, delaying deliveries of key components such as HVAC systems, elevators, and other manufactured building elements. If tariffs and trade restrictions lead to prolonged supply chain instability, real estate companies will need to rethink procurement strategies, seek alternative suppliers, and consider domestic manufacturing options — potentially at a higher cost.
3. Industrial Real Estate and Logistics Sees Tenant Volatility. Industrial real estate has been one of the strongest-performing asset classes in recent years, driven by booming e-commerce and increased demand for warehousing. Indeed, since 2020 – during a period when other real estate sectors’ rents declined – the industrial segment saw rents grow by 40% on average. A full-scale trade war, however, could disrupt supply chain patterns, altering where goods are manufactured, stored, and distributed, bringing potential risks for industrial real estate companies.
- Manufacturing reshoring may drive demand for industrial properties in key U.S. markets as companies shift production away from tariff-heavy regions.
- Port and distribution hubs could see shifts in activity levels as companies reroute supply chains in response to trade barriers.
- Retail and warehouse tenants that rely on low-cost imported goods may experience margin compression, leading to potential lease renegotiations or downsizing.
4. Commercial and Retail Tenant Exposure to Recession-Sensitive Industries. Trade wars don’t just impact the real estate sector itself — they also affect the industries that lease commercial, industrial, and retail space. If tariffs escalate, industries such as manufacturing, retail, and logistics could see profit margins squeezed, leading to reduced expansion plans, slower lease-up rates, and increased tenant default risk. All this can be exacerbated if the U.S. falls into a recession. Retail landlords, in particular, may need to monitor how tariffs on consumer goods and consumer sentiment impact tenant sales performance. Higher prices for imported products could dampen consumer spending, negatively affecting brick-and-mortar retailers that are already contending with e-commerce disruption.
5. Volatility in Foreign Investment and Capital Markets. A prolonged trade conflict could also disrupt real estate capital flows, particularly from international investors. Historically, foreign capita l— especially from China and other Asian markets — has played a major role in U.S. commercial real estate investment (e.g., foreign investment in U.S. real estate has totaled nearly $60B in recent years). However, ongoing trade tensions could lead to restrictions on outbound investment from key foreign markets, reducing liquidity in major real estate hubs such as New York, Los Angeles, and Miami. At the same time, economic uncertainty could lead to increased volatility in interest rates and debt markets, impacting refinancing options and overall investment returns.
How Real Estate Companies Can Stay Ahead
- Adapt to Rising Construction Costs and Supply Chain Uncertainty. Diversify supplier relationships to reduce dependence on tariff-affected materials, explore alternative materials and modular construction methods to mitigate cost pressures, and lock in pricing and secure inventory in advance to hedge against future price increases
- Assess Portfolio Exposure to Trade-Sensitive Tenants. Identify and monitor tenants in retail, logistics, and manufacturing that could be at risk due to tariffs, consider lease restructuring strategies to mitigate vacancy risks in trade-exposed sectors, and strengthen tenant relationships to ensure long-term stability.
- Plan for Capital Market Volatility. Evaluate debt exposure and refinancing risks in an uncertain economic environment, monitor changes in foreign investment regulations that could impact liquidity in key real estate markets, and strengthen cash reserves and financial flexibility to navigate potential downturns.
A few considerations for the Board of Directors:
- Does your company have a proactive strategy to navigate an evolving trade policy landscape, or is it merely reacting to external shocks?
- How is your company hedging against the impact of rising material costs on development projects and construction timelines?
- What steps are being taken to assess tenant exposure to trade-sensitive industries and ensure portfolio resilience?
- How is your company positioning itself to capitalize on potential shifts in industrial and logistics real estate demand?
- Are investment and capital allocation strategies prepared for foreign capital outflows and potential market volatility?
Additional Telesto resources:
- Adapting to new trade realities: The impact of USMCA on CPG company board’s priorities
- What Canada and Mexico tariffs will mean for CPG companies – questions for the boardroom
- Trump 2.0 tariffs and preparedness for Industrial companies
- Navigating corporate climate action under a second Trump administration – 7 focal points for business leaders
- Atlas, equips your organization’s corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG
- Prism, our ESG benchmarking tool, helps your organization to rapidly strengthen its sustainability, climate, and ESG performance and disclosures through in-depth benchmarking of industry peers and identification of gaps and areas of distinction
