The Fed Expects Tariff Inflation To Be Transitory. Will That Spare Real Estate?

President Donald Trump’s ever-changing trade policy has led pervasive uncertainty to take hold across the economy, with questions swirling about rising inflation and how the inevitable next set of tariffs will ripple across markets.

Federal Reserve Chair Jerome Powell, attempting to address the concerns of the market, resurrected a relic of the pandemic following the March meeting of the Federal Open Market Committee.

“It can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by us, if it's transitory,” Powell told reporters after announcing the central bank would keep rates flat. “That can be the case in the case of tariff inflation.” 

In today’s economy, the word transitory comes with baggage. It’s the same descriptor that the Fed used when prices started rising during the pandemic. The central bank was wrong at that time, and the Fed continues its fight against inflation today.  

Whether or not the Fed is right this time, everyone agrees prices will go up in response to new tariffs, which will most immediately impact developers trying to get projects out of the ground. But if the increase to inflation is stickier than expected, the results for the sector would be more mixed. 

“You can approach it as a one-time price hike and, in that instance, it is transitory,” said Matthew Walsh, a housing economist at Moody's Analytics. “But there's larger questions about whether or not supply chains get rerouted, and that would reflect a more substantial increase in inflation.” 

The median expectation from members of the Federal Open Markets Committee on where they expect inflation to be at the end of the year was 2.5% in March, up 30 basis points from December. Fed officials expect it will begin to come down in early 2026, but the path to its longtime goal of 2% inflation remains unclear.

Powell stressed that it was operating off of base-case assumptions that could change in real time as new economic data comes in, although he waved away negative consumer survey data and said the Fed was focused on quantifiable impacts to the economy.

“There's a lot of scope for that view to change,” said Trepp Chief Economist Rachel Szymanski. “There's reasons why [inflation] might be persistent, but for now, they're operating under the transitory assumption.”

The immediate impacts will be felt by developers, Szymanski said, as tariffs on raw materials are passed onto buyers. CBRE projects tariffs could drive construction costs up by as much as 5%, which may be enough for some developers to shelve projects. 

Even if the impacts of tariffs are transitory, the cost increases will be lasting. 

“This is a one-time jump in price growth that comes back down, but it's a one-time permanent jump in the price level,” Szymanski said. “In the transitory case, you're still seeing a higher price level. Consumers will still feel this.” 

Fewer new developments isn’t necessarily bad news for multifamily owners and investors, who expect the lack of new projects will translate into future rent growth. But if the pace of price increases remains elevated, there could be knock-on effects in commercial real estate. 

Jim Costello, chief economist at MSCI Real Assets, said the first round of tariffs implemented during the first Trump administration were largely absorbed by corporations instead of passed along to buyers. But he said the on-again, off-again policies coming from the White House made it harder for corporations to forecast where costs are heading, making it more likely that consumers will see prices rise. 

Inflation could also remain elevated if corporations, aware that consumers are watching their wallets, are reluctant to pass costs onto consumers in one price hike and instead slowly raise prices to make up the cost.

Shipping firms could reroute supply chains to avoid tariffed countries, rippling into the warehouse sector. But the broader concern is that persistently higher inflation would only add to the growing uncertainty being generated by the rapidly changing economic and trade policy coming out of Trump’s White House. 

The rising chance of a recession could push investors into real estate in the near term as they turn to traditionally resilient and insulated sectors. But a persistent economic slump would nonetheless weigh on the sector as companies, renters and consumers pull back on spending. Still, real estate is better positioned to weather a downturn than other industries. 

“We think investors should have exposure to real estate stocks,” J.P. Morgan analysts wrote in a note this week.

Stocks in the sector are outperforming the broader markets so far this year and commercial real estate fundamentals remain stable, they said. Transaction activity is expected to pick up later this year, which could provide further tailwinds to the sector as investors reassess valuations across the broader equity market. 

“All the property types will be exposed to overall economic conditions. If we go into a recession, they're all going to face some sort of demand pullback,” Szymanski said. “Tariffs are going to have an effect on the economy, but I think real estate is relatively well insulated compared to other sectors.”