In the face of seemingly continuous news cycles reporting various policy initiatives from Washington, many of our clients are asking; “What does all of this mean to the construction market and to my project?” Current key areas of focus are the imposition of tariffs on building materials, as well as the interrelated topic of immigration restrictions and enforcement.
While uncertainty appears to be the only certainty these days, this is a good opportunity to contextualize current industry dynamics and potential impacts on real estate development across the country for 2025.
Tariffs
We base our findings on SPD’s daily interactions with owners, contractors and developers across our portfolio of more than 240 active projects in 33 states and the Caribbean. Our current and historic project data(which amounts to more than 800 projects and $200 billion in hard costs)suggests that building materials typically range between 30% and 55% of hard costs. However, between 5% and 30% of those building materials used on these projects are imported from outside the U.S. and even a smaller percentage are from China, Mexico, or Canada.
For context, the most recent directives from Washington included a 25% tariff on steel from China and Canada. The material cost of steel on a project can vary from less than 1% on a low-rise, stick-built apartment complex to about 5% on a major sports venue or high-rise office building.
Using the example above, a 25% increase on 5% of a project’s hard cost would raise the total hard cost of the project by 1.25%. Painful? Of course, but not necessarily fatal. However, if tariffs are applied more broadly and include significant quantities of building materials and electronic components for example, the percentage affected could be that much greater.
Knowing the facts on your particular project will also help mitigate “opportunism” from suppliers and contractors, who tend to overstate actual impacts in an effort to create an additional profit center for themselves. In fact, we are already seeing the letter writing campaigns from contractors, who are notifying their clients regarding a “potential increase” in project costs due to tariffs. It is also commonplace for “non-tariffed” suppliers to quickly raise their prices in reaction to increased demand for their products.
The table is certainly set for predatory pricing. Owners must be vigilant and demand “auditable proof” of actual tariff impositions. Terms and conditions of existing construction contracts are also worth a fresh review.
So, the underlying message is that each project needs to “slice its own data” to really understand the actual impact of tariff impositions, which as you know, are constantly subject to change.
Immigration
Depending on the level of immigration enforcement implemented by the administration, the potential impacts to our industry could be far more severe than the tariffs currently in place.
Nothing will adversely impact a project more in terms of budget and schedule than a labor shortage. Given the relatively high ratio (in some states over 30%) of “less than fully documented” construction workers in our industry, sweeping immigration reform would swiftly and dramatically alter productivity and pricing.
SPD is closely monitoring trade counts on our 200-plus active projects across the country in terms of labor counts, and already there are limited examples of workers “not showing up” to the job site for fear of deportation. We saw this dynamic back in 2023 when Florida required all businesses with more than 25 employees to register all staff through the Federal E-Verify system. Hundreds of thousands of service workers left the state then gradually returned when it became clear that enforcement was relatively benign.
Absent these “event-driven catalysts,” our forecast for 2025 would primarily have been one of incremental growth and muted escalation, with overall demand healthy, but levelling off in most markets. Interest rates appear to be stabilizing, and inflation (until recently) seemed under control.
Of course, regional challenges due to the ever-increasing amount and severity of natural disasters (resulting in both workforce challenges and the lack of affordable property insurance coverage) tragically appear to be a reality that is here to stay.
Lastly, the proliferation of large industrial complexes and data centers is spiking costs and timelines for critical building components as well as electrical power and water in some markets.
While SPD is not bashful about opining on predictive outcomes, the nature and extent of tariffs and immigration impositions is certainly an evolving situation and subject to change on a daily basis. The hope for our industry, of course, is that the administration finds a way to “thread the needle” between achieving its policy goals without eviscerating a workforce that is truly irreplaceable in most markets.
History tells us that developers and contractors constantly adapt to cost spikes imposed by shortages or tariffs and find alternate markets or materials to use, in order to mitigate or avoid cost impacts. Navigating these choppy waters will be as important as ever in 2025.
We will keep you apprised…
