Tariff, Risk and Reward: What Commercial Real Estate Investors Should Watch

Recent economic environment brings more risks and rewards alike to commercial real estate

President Donald Trump's tariff policy has sparked economic uncertainty, with negotiation going on among global trading partners and additional specifications under consideration. While aimed at boosting domestic manufacturing, these policies are expected to create market volatility and low economic growth for the time being. Some commercial real estate sectors face significant impacts, particularly in industrial and retail properties, as reduced consumer spending and disrupted supply chains affect demand. This blog will examine how these tariffs are influencing key sectors and market dynamics, and what challenges alongside opportunities brokers and investors should be prepared for in the upcoming months.

Retail Takes the First Hit

As expected, the retail real estate sector faces mixed impacts from tariffs, with its record-low availability rate of 4.8% providing some resilience against potential challenges. Higher costs from tariffs, particularly on goods like apparel, electronics, and furniture—key retail categories—may lead to reduced consumer spending, store closures, and a shift toward e-commerce, or smaller footprint stores offering less goods. Malls and lifestyle centers are especially vulnerable due to their reliance on apparel tenants, while power centers and neighborhood strip centers anchored by discount or food stores are better positioned to weather these effects. Retailers are also delaying leases and expansion plans amid uncertainty, focusing instead on operational efficiency.

To navigate these uncertainties, brokers and investors should focus on diversifying portfolios across asset types and geographic regions less exposed to tariff volatility (pay special attention to power centers or e-commerce-related logistics spaces!). Additionally, leveraging long-term lease strategies or renegotiating terms to lock in favorable rates can mitigate risks.

Difficulties and Opportunities Ride Side By Side in Industrial

Looking at the industrial real estate sector, trade policy uncertainty has led many industrial occupiers to delay leasing decisions, while others increasingly outsource to third-party logistics (3PL) providers, boosting their share of leasing activity. According to CBRE’s predictions, border markets like El Paso and Laredo face short-term challenges from tariffs on Mexican goods, though long-term demand is expected to benefit from proximity to Mexico’s manufacturing base and USMCA protections. Similarly, markets such as Dallas-Fort Worth and Kansas City, may see temporary slowdowns but remain resilient due to strong demographics and diverse economies. In the Upper Midwest, cities like Detroit, Milwaukee, and Chicago could experience reduced tenant demand due to reliance on Canadian imports, particularly in auto manufacturing. Meanwhile, West Coast port markets, including Los Angeles and the Inland Empire, are heavily affected by tariffs on Chinese goods, leading to reduced warehouse demand as trade slows. However, the push for domestic manufacturing—spurred by potential tariffs in the long run—could create opportunities in less port or rail oriented distribution hubs in future years.

Adding to the pressures, the construction industry—integral to industrial development—is also feeling the strain of tariffs. Material costs for steel, aluminum, and lumber have surged by 10% to 25%, with 80% of contractors reporting price increases and 1 in 5 experiencing project delays. The uncertainty surrounding tariff policies has led many businesses to pause or cancel planned investments, further dampening construction activity. The Nareit Equity REITs index reflects this instability, with industrial REITs like Prologis seeing significant stock declines.

For brokers and investors, adapting to these changes requires a focus on markets poised to benefit from reshoring efforts and domestic supply chain realignments. On April 14, Nvidia just announced its plan to land supercomputer production plants in Houston and Dallas. If industries like AI, semiconductors, and electric vehicles expand in the U.S.-based operations, strategic investments in industrial hubs with strong infrastructure and workforce availability will be key. Additionally, staying agile in lease negotiations and monitoring policy developments will help mitigate risks in this evolving landscape as the economic environment stays highly dynamic and unpredictable.

Investors Are Staying Alert

A high-tariff environment is reshaping investment strategies and capital markets in commercial real estate, primarily by driving up costs and injecting uncertainty into the market. Tariffs on key construction materials like lumber, steel, and aluminum have led to higher development and renovation expenses, which are often passed on to consumers and tenants, making new projects more expensive and reducing profit margins for developers and investors. As a result, investors are increasingly favoring fix-and-flip properties, recently renovated assets, and properties with long-term, fixed-rate debt to hedge against rising costs and interest rate volatility.

Modular construction is also gaining traction as it can offer lower costs and faster timelines, partially offsetting the impact of tariffs on traditional building methods.

The uncertainty surrounding tariffs has also made many investors cautious, leading to delayed or canceled projects and a slowdown in capital markets activity. Higher costs and inflationary pressures may prompt the Federal Reserve to adjust interest rates, with the direction depending on whether tariff-driven price increases are seen as temporary or persistent. If the Fed cuts rates to support a slowing economy (which, so far, has not been indicated by Jerome Powell), this could create new opportunities for investors; if it raises rates to combat inflation, borrowing costs and cap rates will rise, further dampening investment activity.

Foreign capital flows are also in flux: while initial tariff threats strengthened the dollar, recent recession fears have weakened it, potentially making U.S. real estate more attractive to foreign investors.

In this climate, investors are advised to focus on cash flow-positive assets, leverage tax strategies like cost segregation, and work with the U.S.-based suppliers to control costs. Ultimately, while the high-tariff economy presents risks, it also offers opportunities for those who adapt their strategies and maintain a long-term perspective.

To sum up, The recent change in U.S. tariff policies have created challenges and uncertainties across commercial real estate, impacting retail, industrial, and capital markets. While higher costs and supply disruptions pose risks, opportunities exist in domestic manufacturing and innovative building methods. Staying informed and flexible will help industry players navigate this evolving landscape and seize new opportunities.