The U.S. construction market is bracing for the impact of President Donald Trump’s newly announced tariffs on materials imported from China, Canada and Mexico. With approximately 46% of U.S. construction materials sourced from these countries, and 35% to 50% of total multifamily project construction costs tied to finished materials such as lumber, appliances and HVAC equipment, the tariffs are inherently inflationary. Based on these numbers, it can be reasonably estimated that material costs for multifamily construction projects could spike 7.5%, which could increase total construction budgets by 3% to 4%.
An informal survey of our construction partners showed that they are looking toward the first half of 2025 with concern about tariffs as well, particularly on lumber and electrical gear—but those fears are dwarfed by another, more immediate concern. Read on to find out how they believe the year could shape up.
Multiple Challenges Facing Construction Industry
However, while the math points to rising costs due to tariffs, the actual impact may be tempered by current market conditions. Capital market challenges and softened rents (read the latest rent growth forecast from Multilytics®️ for more on that) are creating further headwinds on new construction starts. Moreover, forward-looking indicators such as building permits and starts in all housing sectors continue to show elevated completions relative to new starts. However, as shown in the chart below, this spread is narrowing. That suggests demand for construction materials is likely to remain subdued in the short term, at least partially offsetting any inflationary effects of tariffs.
The fact that permitting has remained flat to slightly negative over the past two years suggests that in the long term, housing completions will remain subdued. Bigger picture, this means that the pernicious housing shortage the U.S. faces will persist.
New Residential Construction, 12/19-12/24
Source: U.S. Census Bureau, HUD January 17 2025
Implications and Strategic Response
Near-term impact on new projects: Tariff-driven cost increases and existing market challenges likely will delay new project starts. Another key element integrated into tariff-related policy is oil and gas, which we are monitoring closely. Canadian energy products face a 10% tariff. Energy prices directly impact the production, transportation and availability of key materials like asphalt, concrete, steel and plastics. All rely heavily on petroleum-based inputs and energy-intensive manufacturing processes. Higher energy prices can mean higher transportation costs that can ripple through the entire construction supply chain. Monitoring energy market trends allows us to better anticipate changes in material pricing, and plan budgets and project timelines more accurately. Other potential offsetting factors that could counterbalance tariff pressures include:
- Supply chains may shift to other countries, reducing reliance on affected imports.
- Subcontractor fees and supply chain efficiencies might help absorb some of the impact.
- Rent increases and/or reductions in the cost of capital may make new projects more feasible.
Immediate concerns for ongoing projects: With tariffs on the way, projects already under construction face new cost pressures. To mitigate this, we are exploring options to purchase materials before the tariffs take effect and reduce exposure to price volatility. In the next three to six months, we are monitoring material supply chains, exploring alternative sourcing options, and ensuring cost management across our portfolio. Longer term, we will assess how market adjustments—such as shifts in global sourcing and potential rent increases—might change our assessments of project viability.
Construction Partners Survey Results
Twice a year, we survey our construction partners across Origin’s investment markets to gather dollar-per-square-foot pricing for local markets, broken down by multifamily building product types (build-for-rent townhomes versus garden style, for instance). In our previous survey, covering the second half of 2024, our partners expressed uncertainty about pricing forecasts due to the presidential election and anticipated Federal Reserve rate cuts. With those events behind us, we are using these new responses to better understand priorities and expectations for the future.
Despite concerns about tariffs, most respondents saw flat (40.9%) to moderate (45.5%) increases in construction pricing trends for 2025, while an optimistic 13.6% anticipated a moderate decrease.
Biggest Challenges Facing Multifamily Construction in 2025
While labor availability remains a concern, most respondents don’t expect labor costs to surge dramatically. Around 27% anticipate increases of 5% to 10%, while another 27% expect increases of 1% to 5%. Nearly a third predict no change in labor costs, and approximately 14% expect a decline of 1% to 5%. The optimism surrounding labor availability is further reflected in responses to our question, “How do you think subcontractor availability will impact your projects in 2025?” Over 70% of respondents forecast significant or moderate improvement, while 13.6% expect no change, and 13.6% predict a moderate decline.
Though financing remains the primary concern for most respondents, tariffs are also a notable worry.
Concern About Impact of Tariffs on Material Costs
for Multifamily Construction in 2025
Apart from tariffs, respondents said they were most concerned about pricing volatility in lumber (40.9%), electrical switchgear and components (27.3%) and concrete (18.3)%.
While the multifamily construction industry braces for potential tariff-related cost increases, the road ahead includes challenges and opportunities. It’s likely the ripple effects of tariffs will lead to delays in new project starts and tighter cost management for ongoing projects. However, survey results offer some optimism. Our construction partners expect labor costs to remain stable or improve, that subcontractor availability may increase, and broader demand for materials may remain subdued. All these can temper the inflationary impact of tariffs.
