How Tariffs Are Reshaping CRE Investment, Financing, and Construction

SKIP AHEAD TO

• Sentiment
• Financing
• Construction
• Looking forward

The dominant economic story of the second quarter of 2025 has been tariffs. Ever since Trump shocked markets with his “Liberation Day” tariffs, global markets have gyrated in response to frenetic changes in American trade policy. Although the actual form tariffs will take is unpredictable, it is clear that uncertainty and headwinds will be present in global trade and within the economy more generally. This uncertainty filters into the CRE market, leading to changes in the sector’s outlook. In this article, we will examine how tariffs are playing out to affect investor sentiment, project financing, and construction, and what the coming months and years might bring.

Sentiment

Investor sentiment has been on a wild ride over the past two months. In the first week of April, after Trump surprised the world with far steeper than expected tariffs, markets suffered their wildest swings since the onset of the COVID pandemic and teetered on the brink of a bear market before staging a rapid turnaround.

It’s worth looking into the dynamics that drove this trade within the commercial real estate sector. During the market rout, there was a rotation out of speculative and growth-driven REITs into REITs focused on defensive sectors, e.g., health care, telecom, and infrastructure. Within sectors, investors are also moving cautiously, performing a so-called “flight to quality” in sectors such as office and retail. These patterns indicate how investors are quick to reallocate their commercial real estate holdings and are likely to prioritize defensive assets for the time being.

Before the tariff commotion, investor sentiment in U.S. commercial real estate showed cautious optimism. Industry surveys show investors expect higher returns going forward, partially as compensation for higher interest rates and risk. For instance, PREA’s consensus forecast projects a 6.6% total return for institutionally-held CRE in 2025, a sharp jump from nearly 1% in 2024 as investors believe the market is bottoming out. Correspondingly, many investors have raised their target IRRs by ~100– 200 bps over the past year to reflect the new cost of debt and inflation; core funds that once underwrote 6% unlevered returns are now seeking closer to 8%. 

It remains to be seen whether this optimism can weather tariff-induced chaos.

Financing

Uncertainty over tariffs and the broader economic outlook is a headwind on economic growth and financing for commercial real estate projects. Although CBRE’s annual investor intentions survey found 70% of investors intend to buy more CRE in 2025 than last year, anticipating that pricing has reset and opportunities are emerging. However, the biggest cited challenge is “elevated and volatile long-term interest rates, which make deals underwriting tricky. This volatility is directly tied to fiscal and trade policy gyrations. Survey data indicates cap rate-expansion expectations have mostly stabilized across sectors, except office, where further price declines are expected.

Financing is also shaped by the performance of CRE loans in the broader market.  A larger-than-average number of CRE loans are scheduled to mature in the coming year. The vast majority of these loans were financed at substantially lower interest rates than current averages.  In this environment, refinancings and new loan issuance will be painful, and many projects that are just barely hanging on may struggle.  

Loan conditions have changed the appearance of the average CRE loan in 2025.  Average loan-to-value ratios on acquisitions are down, often 50–60% vs 65% + historically, as buyers conservatively finance deals in a higher-rate environment (and some lenders require more equity). Hold periods are extending – a number of value-add funds have delayed asset dispositions, effectively lengthening holds by 1–2 years, hoping to sell into a more favorable 2026 market. According to a Pension & Investments survey, investors in mid-2024 were “sitting on their hands,” especially regarding office, waiting for clearer signs of recovery. That sentiment largely carried into 2025 for offices, whereas investors grew more upbeat on sectors like industrial and multifamily (which rank as the most preferred property types in 2025 surveys, with retail also gaining favor amid its low vacancies).

Overall, while “dry powder” remains in the investment landscape, uncertainty is likely to chill the CRE dealmaking environment in the near term. 

Construction

Construction in the CRE industry is shaped by expected economic conditions, and at the cost of input materials needed to build new buildings.  

On the economic side of things, construction follows similar trends as the larger markets. New projects in defensive sectors such as healthcare are more likely to be greenlit. Continued housing shortages in major metros make projects that can clear regulatory hurdles a compelling case to be built. More speculative projects, and interestingly, new industrial projects, are increasingly on pause as investors wait to see how tariff uncertainty settles out.

Interestingly, new construction has a substantial vulnerability to tariffs — the cost of input materials. Trump’s tariffs have specifically targeted imports of crucial construction materials such as lumber and steel with sector-specific tariffs. Any increases in US production of these inputs are many years away, meaning that if these tariffs remain in place, consumers and businesses will face significantly higher building material costs.

An important nuance of trade law makes tariffs on construction inputs more likely to last than Trump’s other tariffs. Trump’s contentious country-specific tariffs rest on a provision known as Section 301 of the Trade Act of 1974. This authority rests on documenting “unfair trade practices” and has already been blocked in court based on the court’s view that the determination of “unfair trade practices” was insufficient. On the other hand, Trump’s Steel & Aluminum tariffs are based on Section 232 of the Trade Expansion Act of 1962. This act gives the president the authority to impose tariffs based on national security concerns. This power is broader and has already been upheld by the Supreme Court. As such, even if the headline-grabbing country-specific Trump tariffs are struck down, tariffs on construction inputs are likely to remain.

Tariffs Threaten to Exacerbate Construction Cost and Supply Chain Pressures

Tariffs could put upward pressure on material costs and restrict access to key commercial real estate buildout components, such as steel, glass, tiling, fiberglass, lighting, furniture, and more, at a time when domestic supply may not be sufficient to cushion the disruption of overseas supply chains. Since January 2019, the Producer Price Index for net inputs for nonresidential construction and goods has risen 44.4% with the largest increase taking place between April 2020 and June 2022, when it hit its most recent peak. The index has continued to increase thus far in 2025, rising 1.7% since January 2025, as of May 2025.

In addition, office tenant improvement (TI) allowances and buildout costs have been on the rise since the onset of COVID-19, driven by both escalating construction material costs and increased tenant demand for higher-quality space amid a soft leasing environment. According to CompStak lease data, average office lease work values (weighted by transaction size) have increased 112% from 2016 to year-to-date 2025, even after a pullback from the 2023 peak. While TI values had recently shown signs of moderating, they remain well above pre-COVID levels.

Now, newly imposed tariffs threaten to push construction costs even higher, potentially widening the gap between landlord-provided TI allowances and the true cost of tenant buildouts. This added cost pressure comes just as the office market had shown early signs of stabilizing, with landlords beginning to regain leverage, particularly for top-tier assets. However, renewed economic uncertainty and broad-based cost increases across U.S. businesses could disrupt that momentum, raising new challenges for both landlords and tenants in absorbing rising TI costs.

Looking forward

Uncertainty continues to be the watchword for the CRE market in the first months of the Trump Administration. Eventually, when the seesaw of tariffs, pronouncements and court orders abates, we can expect to see more clarity in the CRE market and the economy as a whole. Until then, join CompStak for the most up-to-date information on the CRE market, trends, and future developments.