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Tariffs & Real Estate Impact

4/22/2025

by Kevin White, DWS Head of Real Estate Research – Americas

Silhouette of engineer and construction team working safely on scaffolding on high rise building.

Background

On April 2, President Trump announced “Liberation Day” tariffs – 10% baseline and so-called reciprocal tar-iffs on a country-by-country basis. This follows previously announced duties on China, Canada, Mexico, steel, aluminum, and autos. On April 9, the President announced a 90-day pause to the reciprocal tariff measures, while keeping 10% baseline tariffs in place and further increasing tariffs on China. Temporary further relief was later announced on certain electronics. These rapid policy shifts underscore high levels of uncertainty that surround expectations for the economy, financial markets, and real estate.

Real Estate Implications

While the long-term economic consequences of higher tariffs are subject to debate, there is a near-consensus that they will slow growth and lift inflation over the near term. Weaker growth will weigh on physical real estate demand and rent growth. However, unlike in previous downturns, construction pipelines are extremely low, which should help to offset any demand-side weakness. Whether capital markets amplify the impact of weaker fundamentals remains uncertain. Long-term corporate BAA yields, a strong proxy for cap rates, have edged higher in recent days, but it remains to be seen whether these moves are more technical (i.e., fund flows) or fundamental (e.g., shifting sentiment around inflation, monetary policy, and risk premiums).

Over the long run, we believe that elevated tariffs will drive stronger real estate total returns. Real estate prices have already dropped about 20% since their prior peak (Q2 2022). Tariffs will likely put upward pres-sure on construction costs, forestalling development and exacerbating supply shortages that were already anticipated over the next several years. As real estate values are governed by replacement costs, we fore-cast these shortages will drive rent and capital appreciation until they rise to levels that justify new con-struction.

From a sector perspective, we see greater near-term risks in Industrial real estate sector, which is subject to trade disruptions and discretionary goods spending, particularly in coastal markets. However, we see more resilience in the near term and potential upside over the medium term around inland markets and dense population centers, which should benefit from onshoring and ongoing e-commerce expansion. Also defensive, in our view, are the residential and grocery-anchored retail real estate sectors, whose demand drivers (household formation and necessity spending) are less cyclically sensitive (discretionary goods-driven retail centers are more vulnerable). Offices have historically exhibited a higher beta to the wider real estate market. However, a nascent recovery in office attendance and the likelihood that any near-term economic weakness will be more concentrated in goods (e.g., manufacturing) than services (e.g., technology) may help to mute, at the margin, downside risks to this sector.

New tariff measures may lead to price inefficiency and disruption over the near term. However, we believe current market opportunities and long-term structural tailwinds, with the recent pricing correction may create attractive valuations and a compelling entry point for real estate investment.

Additional Resources

Real Estate Minute | March 19, 2025

The potential impact of DOGE downsizing initiatives on the office market

Southern California Industrial Market: Prospects in Uncertain Times

by Ross Adams, Research & Strategy, Alternatives

Los Angeles County Wildfires: Implications for Residential & Commercial Real Est...

The Los Angeles County wildfires have become the region's worst fire disaster in history. What will the impacts be across residential and commercial properties.

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Tariffs & Real Estate Impact

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