Intelligent Investment
On Again, Off Again: Tariffs & Commercial Real Estate
March 19, 2025 4 Minute Read
Executive Summary
- President Trump has imposed tariffs of up to 25% on certain goods from America’s top two trading partners—Mexico and Canada—and has levied an additional 10% tariff on goods from China, the country’s third-largest trading partner. Additional tariffs are also being considered.
- Exceptions were granted until April 2 for imports from Canada and Mexico covered under the USMCA.
- Consensus among economists is that tariffs, which have already contributed to sharp volatility in both bond and equity markets, will slow short-term economic growth and increase inflation. In the long term, tariffs may persuade some companies to boost domestic manufacturing activity.
- Industrial and retail property fundamentals will see the most immediate impacts from tariffs if consumer spending power is reduced and the flow of goods shifts. The office market recovery should continue, barring an economic downturn.
- 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.
Figure 1: Country of Origin Share of Imports at All U.S. Ports
Why Tariffs Matter for Commercial Real Estate
The flow of goods and consumer spending are key drivers of demand for industrial and retail space. Tariffs can reduce overall spending power and slow economic growth since their costs are often passed on to consumers. Over the short term, this can cause companies to delay signing leases for all commercial property types and undertaking capital projects. Higher inflation also has an impact on borrowing costs to finance real estate investment.
Should they take full effect, tariffs are estimated to increase costs for a typical U.S. household by $1,200 a year.1 These higher costs would more than offset the benefit from extending the 2017 federal tax cuts, which expire at the end of this year. For households purchasing an auto, the additional cost could be at least $4,000.2
These higher costs are estimated to trim about 0.4 percentage points off U.S. GDP growth this year. Meanwhile, Core PCE (the Fed’s preferred inflation measure) is expected to be 0.4 percentage points higher than it otherwise would be, averaging 3.1% for 2025 and well above the Fed’s 2% target. Forecasting models also show that interest rates would be higher than currently expected.3 However, a weakening labor market could cause the Fed to resume interest rate cuts.
After roughly three to five years, tariffs could potentially add as many as 400,000 new domestic manufacturing jobs,4 particularly in Rust Belt states; however, this does not account for domestic manufacturing jobs lost due to lower exports caused by retaliatory tariffs. Manufacturing jobs have fallen to 12.7 million from 17.3 million since 2000. Revived domestic manufacturing would support higher levels of demand for industrial space, as well as for other property types in some markets.
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.
Impacted Industries
Import data suggests that the automotive and construction industries would be particularly affected by higher U.S. tariff regimes. Given the interconnectivity of auto supply chains in North America, tariffs present especially acute challenges for the domestic auto industry. This clearly factored into President Trump’s decision to delay tariffs on automakers. Although carveouts and delays are welcomed, erratic trade policy presents a broader challenge for industry.
Tariffs can also have a material impact on the cost of commercial real estate construction. Some property types will be more affected than others. For example, industrial projects will be less impacted than multifamily projects given different equipment and materials requirements. Assuming 25% tariffs on Mexican and Canadian goods, as well as higher tariffs on Chinese imports, construction costs for commercial projects could increase by between 3% and 5%,5 which could persuade developers to put some projects on hold. Less new supply due to project delays would boost certain property fundamentals. In the multifamily sector, for example, there would be more time for demand to catch up with a recent supply surge. But this could eventually lead to supply shortages in certain sectors, such as those that are emerging for prime office space.
Beyond this, consumer goods, such as mobile phones, televisions, apparel and toys, will be impacted by tariffs on imports from China and Mexico. Meanwhile, energy products from Canada that are not included in the USMCA will be treated more preferentially with tariffs of 10%.
Figure 2: Top-Five Imported Products from Top-Three Importing Countries (2024)
Property Type & Market Impacts
Industrial and retail leasing demand likely will see the most direct impacts as consumer spending decreases and the flow of goods shifts. Other property types, such as multifamily, office and hotels, would experience secondary effects of slower growth, which would include less demand and new supply as construction costs rise.
Clearly, a slowing economy and falling equity markets are weakening service sector sentiment. However, barring an economic downturn, the office market, which is the largest commercial real estate asset class, should continue to benefit from return-to-office and flight-to-quality trends, as well as considerable pent-up demand for prime space in major cities.
Some industrial occupiers may delay leasing decisions amid trade policy uncertainty and more of them will outsource to 3PL providers, which likely will see their share of overall leasing activity rise.
Tariffs on Mexican and Canadian goods could slow leasing demand in border markets and along key trade routes; however, the scope will vary by location. Tariffs on Mexican goods could adversely affect El Paso and Laredo in the short term. Longer term, these markets would benefit from proximity to Mexico’s low-cost manufacturing base and the intellectual property protections contained in the USMCA, which will ultimately underpin demand for warehouse space. Markets along I-35, including San Antonio, Dallas-Ft. Worth and Kansas City, could feel the impact of some companies delaying their leasing decisions; however, these markets’ other strengths—central locations, good demographics and diverse economies—should help compensate for any reduction in imports from Mexico.
Upper Midwest markets that source materials from Canada, including Milwaukee, Minneapolis-St. Paul, Cleveland and Chicago, could see lower tenant requirements. Tariffs on Canadian goods pose the greatest risk to Detroit due to its proximity to the border and its reliance on Canadian-manufactured auto parts.
Tariffs on Chinese goods will heavily affect major U.S. port markets, particularly the West Coast ports of Los Angeles and Long Beach, as well as the Inland Empire.
Capital Markets Impacts
The impact of tariffs on capital markets activity is complex and nuanced and depends partly on the Fed’s reaction to a slowing economy and rising prices.
If the Fed views tariff-induced price increases as a one-off price movement, it may not raise interest rates and could possibly cut them to support a slowing economy. This would boost capital markets activity.
If increased prices from tariffs drive a long-term rise in inflation, particularly in wages, the Fed would have to raise interest rates. This would put upward pressure on long-term interest rates and cap rates, weakening capital markets activity.
More broadly, higher prices from tariffs will reduce household disposable income and slow economic growth. This would weaken fundamentals in all commercial property sectors and reduce capital markets activity due to a mild increase in cap rates.
In terms of foreign capital inflows to the U.S., the threat of tariffs strengthened the dollar following the November presidential election. However, since peaking in early January, the dollar’s value has dropped significantly due to fears of a U.S. recession. A weaker dollar could boost capital markets activity, particularly by foreign investors.
Figure 3: U.S. Dollar Index Pre- & Post-Trump Inauguration
The Bottom Line
Tariffs on large trading partners can materially affect commercial real estate market dynamics depending on how long they are left in place and whether key industries secure carveouts. Tariffs also could yield some positive results in the long term, including an increase in manufacturing activity and employment or increased export opportunities for U.S. companies if other countries lower their tariffs on U.S. goods and barriers to inbound capital flow.
Over the short term, uncertainty about U.S. trade policy will fuel financial market volatility and dampen business sentiment, leading to less investment. However, we still expect a generally supportive backdrop for commercial real estate 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%.
Despite some higher downside risks, savvy investors and occupiers may use this period of uncertainty to take advantage of more favorable prices. CBRE continues to monitor trade policy changes and will provide updates when developments materially change our view of the market. We will be especially attuned to actions taken on April 2, which may include a reimposition of tariffs on USMCA-covered items and the imposition of reciprocal tariffs on U.S. trading partners.
2 Anderson Economic Group, February 2025.
3 Oxford Economics Tariff Monitor, March 2025.
4 Evenett, S.J, and Muendler, M.A., “Game On: Executing Trump’s campaign pledges on tariffs won’t restore manufacturing in the Rust Belt – or elsewhere for that matter,” UC San Diego School of Social Sciences, Jan. 20, 2025.
5 Trammel Crow Company, internal analysis, March 2025.
Contacts
Darin Mellott
Vice President, Head of U.S. Capital Markets Research, CBRE
James Breeze
Vice President, Global Industrial and Retail Research
