U.S. Tariff Regime Shocks Global Trade, Has Repercussions for Commercial Real Estate

Executive Summary

• President Trump’s announcement of a broad-based global tariff regime last Wednesday put the average weighted U.S. tariff higher than at any point in the past 100 years, precipitating a seismic shock to global financial markets and upending long-established trading regimes.
• The macro-economic fallout of Trump’s tariffs is evolving. CBRE’s revised house view calls for slower growth (averaging 1.3%) and higher inflation (mid-3%) for 2025. There is some downside risk to this forecast if retaliatory tariffs escalate. Other economists are more pessimistic about the outlook for economic growth and inflation.
• The impact on interest rates is mixed, with the Fed likely to cut short-term rates three times instead of two to support the labor market. The 10-year Treasury yield likely will stay close to 4%.
• Increased near-term uncertainty will have some effect on commercial real estate investment and leasing activity, especially in the industrial and retail sectors.
• The magnitude of the impacts will depend on how long tariffs are left in place, retaliatory actions by other governments and the outcome of negotiations with key trading partners.

Figure 1: Average Effective U.S. Tariff Rate

Economic Impacts

Higher-than-expected U.S. tariffs announced by President Trump last Wednesday have roiled financial markets and will likely cause businesses and investors to reassess their plans for this year. Looking farther ahead, impacts will depend on how long tariffs are left in place and the extent to which retaliatory tariffs by other countries will impact the U.S. economy.

It is possible that there will be concessions on some tariffs, just as there were on those originally levied on Mexico and Canada. What is not clear is the endgame for the tariffs. The administration has pointed to increased revenues that could offset tax cuts, as well as a fairer trading system and a return of manufacturing to the U.S. These are seemingly contradictory policy goals that make it more difficult to assess the situation.

Commercial Real Estate Impacts

Leasing Activity

Some companies are likely to put their capex plans on hold and delay their leasing decisions until there is more clarity on the extent and duration of global tariffs. Until then, we expect occupiers will favor lease renewals rather than relocations or expansions.

• Office: Return-to-office mandates continue to be the focus of major office occupiers, which have boosted office leasing activity in recent quarters. However, broader economic uncertainty driven by tariffs will cause some occupiers to reassess their plans. Nevertheless, we expect that prime assets in major markets will continue to outperform.
• Industrial: Large third-party logistics (3PL) operators will drive leasing demand as more retailers and wholesalers outsource distribution to them amid heightened macro-economic uncertainty.
• Retail: Sentiment among retailers turned sharply negative last week. While some retailers will pause, we expect to see others continue to move forward with strategic plans amid low vacancy and little new supply.

Capital Markets Activity

The current capital markets outlook is mixed. Higher credit spreads will be counterbalanced by lower benchmark rates. However, the situation remains highly volatile.

Opportunistic investors are likely to remain active with plenty of dry powder. CBRE expects to see activity in long WALE (weighted average lease expiry) assets and credit strategies (preferred equity, bridge loan and distressed), along with arbitrage between public and private market opportunities. However, heightened uncertainty and a potential hit to real estate fundamentals represent downside risks.

Construction Costs

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. Considering all the U.S. tariffs announced through April 2, construction costs for commercial projects could increase by approximately 5%,¹ which could persuade developers to put some new projects on hold.

Figure 2: U.S. Imports by Category