Tariffs And What They Mean For Commercial Real Estate

Opening Bell 🔔: Today marks, “Liberation Day” and long awaited announcements of what tariffs will be implemented become clearer this afternoon. While we wait, let’s look at what we do know so far: it’s been just over a month since 25% tariffs were announced on steel and aluminum imports. What does that mean for the Austin Office CRE market? Let’s take a look.

Market Snapshot 📸:

Prior to tariffs really taking effect, you can see a breakdown of material costs that go into getting a building occupied. In Austin, Drywall & Ceilings, Electrical, and HVAC share the brunt of the cost for construction projects at a $25/PSF basis. Notice, these don’t typically rely on materials that are poised to be directly impacted by tariffs with the exception of HVAC.

Dive Deeper 🤿: Quality already cost you before, it might just be a little more in the near future.

According to STOGB, Austin comes in as the most affordable city in Texas when you factor in the range of finishes used for construction projects. A relatively good sign as economic experts expect costs to rise over the coming months with as tariffs get rolled out.

Pro Insight 🧑‍🏫 : Most companies have had a chance to stockpile materials directly impacted by the administration’s tariffs, so we won’t see an increase in price just yet. However, the increase in price as a result of tariffs typically get passed down to the consumer. In the CRE world, that ends up being the end user of real estate, the tenants. We’ve been in a largely tenant friendly leasing market the last few years so this could lead to a rebalancing of the market. With a flight to quality push during that time, Landlords of Class B and C building assets have struggled to remain competitive.

With materials like steel and aluminum set to become more expensive (at least until domestic manufacturing can ramp up to meet demands), there could be a shift to more Mass Timber projects like we’ve seen at T3 Eastside. More developments relying on alternative materials are already in the works as seen by Sixth&Blanco mixed use project (mass timber + precast concrete) and Workbench (another east side, mass timber project).

Final Buzzer 🚨: While the on-again-off-again tariff tug-o-war reshapes global geopolitics, most decision makers are waiting for the dust to settle some before calling any definitive shots. In the short term, lower classed assets could find themselves poised to capitalized on the slimmer margins as tenants search for more budget-friendly space while they wait for prices to recalibrate.

In the long-term, these tariffs are a bet on US manufacturing and production to be able to meet demand, something that will take time and not a given (just look at US sugar costs and pickup truck production).

Tenants will likely have to eat the bill as costs rise in 2025. We expect that they’ll look to clear off other parts of their financial plate to make room for the real estate costs as a result.

We’ll see you next week as we break down the Q1 Office Report,

Cory