How Tariffs will Effect the Investment Real Estate Market

The Trump administration has wasted no time in imposing new tariffs on some of the nation’s largest trading partners. While the full impact remains uncertain, these tariffs present a double-edged sword. They have the potential to bolster certain sectors of the economy while simultaneously undermining overall economic growth across the country.

The investment real estate market will be one of the sectors affected by the tariffs, with both positive and negative implications for investors. These shifts could create new opportunities while also posing challenges. For real estate investors, understanding these effects and their potential impact on their portfolios is crucial for making informed decisions.

New Tariffs

A new series of tariff increases has been announced on goods from Canada, Mexico, and China. Canada and Mexico face a 20% tariff hike, while China has been hit with a 10% increase. Canada and Mexico are currently negotiating a 30-day delay to reach a resolution, whereas China has responded with retaliatory tariffs on American goods.

The potential trade war with Canada, Mexico, and China could have significant effects on U.S. economic growth and inflation. Canada and Mexico rely heavily on trade with the U.S., with 75% of Canadian exports and 77% of Mexican exports destined for American markets, making them two of the country’s most important trading partners. Meanwhile, although only 15% of Chinese exports go to the U.S., this still represents a substantial economic relationship that could have major implications for global trade dynamics.

Impact on the Market

Economists predict that the new tariffs could slow GDP growth to between 0.7% and 1.8% in 2025. Additionally, inflation could rise back to around 3.5%, which may prompt the Federal Reserve to delay or reconsider further rate cuts next year.

The investment real estate market, particularly the industrial and retail sectors, could feel the impact of these tariffs. A decline in goods movement may lead to reduced demand for warehouse and retail space, whether due to lower demand for American products or a shortage of materials needed for domestic production. The construction sector will also be affected, as tariffs on materials like Canadian lumber and Mexican steel could drive up costs, potentially slowing new development projects and increasing expenses for investors.

Market Gains

The rising cost of materials has been a key factor in the projected slowdown of new development heading into 2025. This downturn is expected to persist for several years, with ripple effects potentially lasting more than five years. The multifamily sector is anticipated to be the hardest hit. However, for investors holding multifamily properties, these tariffs could present a significant upside. With limited new supply, the value of existing inventory is likely to rise, allowing property owners to charge a premium for units. Additionally, investors looking to exit the market could benefit from these favorable conditions by selling properties at a premium.

What it Means for Investors

Investors with a diversified portfolio will be better positioned to navigate the economic headwinds caused by these tariffs. However, those heavily concentrated in specific markets may face significant challenges unless they strategically adapt to shifting market conditions.

The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.