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The second Trump administration has placed tariffs at the center of its economic strategy, wielding them as instruments to recalibrate trade balances and revitalize domestic manufacturing. This policy shift creates a transformative dynamic for commercial real estate investors, developers, and tenants who must now adapt to an uncertain economic terrain.

Economic Reverberations

The financial strain of tariffs will likely hurt American households’ wallets in the near term, with projections indicating an additional $1,200 in annual expenses for typical families. This belt-tightening translates to upcoming economic headwinds—potentially shaving 0.4 percentage points from GDP growth while simultaneously pushing inflation measures upward. The Fed’s preferred inflation gauge, Core PCE, could hover around 3.1% throughout 2025, significantly overshooting the central bank’s 2% target.

This creates a delicate balancing act for the federal reserve. Should tariff-induced price escalations embed themselves into wage structures, the Federal Reserve might maintain current interest rate levels. Alternatively, if the economy stagnates while price increases prove transitory, the Fed could pivot toward stimulative rate cuts. This monetary policy uncertainty directly influences capital costs for property acquisitions, refinancing, and development projects.

Construction Realities and Development Dynamics

The development sector stands particularly vulnerable to tariff pressures, as construction budgets could swell by 3-5% under a regime of 25% tariffs on North American imports alongside elevated duties on Chinese goods. This cost increase threatens to sideline development projects industry wide across all asset classes.

These supply constraints could create varied outcomes. Initially, property fundamentals might strengthen in markets where new deliveries pause, allowing demand to absorb recent inventory expansions. However, extended development droughts could eventually create supply deficits in sectors already experiencing tight vacancy, particularly in prime office submarkets where flight-to-quality trends continue to drive demand.

Investment Landscape

Despite near-term turbulence, several factors provide underlying support for commercial real estate investment. The dollar’s recent depreciation enhances America’s attractiveness to international capital, while projections for stabilizing or decreasing interest rates—with the 10-year Treasury yield recently slipping under 4%—offer a relatively appealing financing environment.

If the tariff strategy creates a manufacturing renaissance in the US, it could bolster property demand across asset classes in manufacturing focused regions, creating geographic bright spots amid broader uncertainty.

Strategic Positioning

For property investors, the current environment demands strategic deployment of capital. The most exposed industries include those with globally dispersed supply networks, offshore production facilities, and significant stateside revenue generation. Conversely, sectors with minimal imported goods exposure—such as financial services and healthcare operations—stand relatively insulated from direct tariff impacts.

Investors should leverage this transitional period to capitalize on temporarily discounted asset valuations and favorable financing while concentrating portfolios around properties demonstrating tenant stability, pricing resilience, and strong fundamentals. Healthcare real estate continues to be a fundamentally robust asset class, attracting new investors eager to allocate capital to investments that offer greater resilience during economic downturns. The sector benefits from strong, sustained demand for healthcare services, capital-intensive tenancy, and favorable demographic trends, all of which position it for continued growth and stability for decades to come.

No question. The cost structure for new outpatient medical space has reached unprecedented heights. High interest rates, a tight labor market, supply chain issues, and record inflation have all contributed to the cost of new outpatient medical space crossing the $35 per square foot threshold and in some instances approaching $40 per square foot.  When confronted with this reality, many physician groups have elected to forego growth opportunities and/or put off relocation to upgraded/expanded space.  The status quo may help manage the expense side of the ledger but does not facilitate revenue growth.

In past cycles, low interest rates helped to negate the impact of rising construction costs. No such luck in the current cycle. From 2022 to 2024, construction costs increased by nearly 25 percent. As for interest rates, the Federal Funds Interest Rate went from 3.25% in September 2022 up to 5.5 to August of 2024 (it was recently cut to 5%). Given the reduced amount of construction demand, contractors have reduced their profit margins to stimulate business. 

While rental rates and development costs will not soon, if ever, return to the pre-pandemic baseline, the next 12-18 months should offer some relief and a degree of stability that the market has not enjoyed the past 5 years.

• Major construction items such as concrete, steel, doors, drywall and lumber have stabilized and even reduced in certain categories.
• Electric and heating, venting and air conditioning (HVAC) have continued to rise but at a reduced pace.
• The decrease in oil prices over the past year has led to lower costs for items such as roofing and adhesives.
• Commodity prices have stabilized.
• Labor costs will likely continue to rise-estimated at 3-5 percent over the next 12-18 months.

All these factors combine to create a stable construction cost environment. Unless there is a sustained recession, prices/costs will not reduce. The best we can hope for is stable pricing. 

Pent up market demands and wants will eventually burst through and once again put upward pressure on construction and development costs. With occupancy rates in outpatient medical buildings currently at 94 percent, groups looking to for new or expansion space will have limited options. Accordingly, new development is likely going to be the most viable option for growth. 

Groups looking for new or expanded space should aggressively explore options in the near term before the cost structure takes another incremental jump. Delaying action will not lead to lower occupancy costs and will lead to missed opportunities to expand the patient base and grow revenue. Groups that understand this reality and take action in the near term will be much better positioned than those kicking the can down the road and then being forced to take action in a much high-cost environment.