As Trump’s “Liberation Day” plans become clearer, we take a look at the impact tariffs will have on the CRE Office Industry.
Today marks “Liberation Day,” and long-awaited announcements of what tariffs will be implemented become clearer this afternoon. While we wait, let’s look at what we know: it’s been just over a month since 25% tariffs were announced on steel and aluminum imports. What does that mean for the Austin Office CRE market? Let’s take a look.
Source: STOBG March Construction Cost Report
Before tariffs take effect, you can see a breakdown of the material costs of occupying a building. In Austin, drywall and ceilings, electrical, and HVAC share the brunt of the cost for construction projects on a $25/PSF basis. Notice that these don’t typically rely on materials poised to be directly impacted by tariffs, except for HVAC.
Quality already cost you before; it might be a little more soon.
Typical Range of Costs of Commercial Tenant Interior Construction: STOGB Report
According to STOGB, Austin is the most affordable city in Texas when you factor in the range of finishes used for construction projects. This is a relatively good sign, as economic experts expect costs to rise over the coming months as tariffs are rolled out.
Most companies have had a chance to stockpile materials directly impacted by the administration’s tariffs, so we won’t see a price increase yet. However, the increase in price as a result of tariffs typically gets passed down to the consumer. In the CRE world, that ends up being the end user of real estate, the tenants. We’ve been in a largely tenant-friendly leasing market for the last few years, which could lead to a rebalancing of the market. With a flight to quality push during that time, Landlords of Class B and C building assets have struggled to remain competitive.
With materials like steel and aluminum set to become more expensive (at least until domestic manufacturing can ramp up to meet demands), there could be a shift to more Mass Timber projects, as seen at T3 Eastside. More developments relying on alternative materials are already in the works, as seen by the Sixth&Blanco mixed-use project (mass timber + precast concrete) and Workbench (another east side mass timber project).
While the on-again, off-again tariff tug-of-war reshapes global geopolitics, most decision-makers are waiting for the dust to settle before calling any definitive shots. In the short term, lower-classed assets could find themselves poised to capitalize on the slimmer margins as tenants search for more budget-friendly space while they wait for prices to recalibrate.
In the long term, these tariffs are a bet on US manufacturing and production meeting demand, something that will take time and is not a given (just look at US sugar costs and pickup truck production).
Tenants will likely have to pay the bill as costs rise in 2025. We expect that they’ll look to clear off other parts of their financial plate to make room for the real estate costs.