Trump's Proposed Steel Tariff Could Have Major Implications For Commercial Real Estate
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President Donald Trump's announcement Thursday that he plans to levy a 25% tariff on imported steel could significantly impact the price of one of the most common materials used in the construction of commercial buildings, putting more pressure on already-high construction costs and potentially preventing some projects from breaking ground.
“It will 100% have an effect," said Hornig Capital Partners Managing Partner Daren Hornig, a New York City developer. "Right now, it’s tough making deals pencil to begin with. A lot of times when you’re looking at development opportunities, it's the cost of construction that just knocks you out of the game because the cost is too high.
"Any increase in construction cost is not going to help the real estate business," he said. "It will slow new construction.”
Steel material comprises roughly 16% of the total building cost for a typical commercial project, according to Edward Zarenski, a construction economics professor at Worcestor Polytechnic Institute who spent 35 years as a construction cost estimator for Gilbane Building Co.
Zarenski predicts Trump's tariff could cause commercial project costs to rise about 1% this year, translating to $7.5B in increased construction prices nationwide.
"The higher inflation gets, the more people begin to think about the projects they're about to build," Zarenski said. "So higher inflationary costs push down the total size of the building, or it might even dissuade some clients from building their new building. You never know what the turning point is that's going to flip a client from saying 'let's move ahead' to 'let's slow down and rethink this.'"
The immediate impact, Zarenski said, could be felt by steel contractors that recently won bids with agreed-upon pricing that are forced to either make an inflation claim to attempt to change the deal price or absorb the loss themselves. In the long term, he expects the higher costs to be passed along by developers to their tenants in the form of higher rents.
Hornig also believes developers will have to pass along the cost increases in order to get projects built, leading to higher prices for condo units in multifamily high-rises or steeper rents for tenants in office towers. The rent increases, he said, will then be passed along by those companies to the broader public that uses their services.
"If it’s more expensive for office space that gets pushed down to the consumer for increased legal fees or accounting fees," Hornig said. "It ends up being a zero-sum game. That’s what’s scary about these broad increases that [Trump's] top advisers were advising him against."
American Institute of Steel Construction Director of Government Relations Brian Raff said he believes the tariff could have a modest impact on steel pricing, but he does not think it would be enough that developers would turn to other materials.
AISC has not taken an official position on the tariffs themselves, Raff said, because its membership comprises a wide swath of the industry that could be impacted in different ways. But the association has been lobbying the administration to include fabricated steel, material that has had alterations made such as drilling or welding, in addition to mild steel, the raw material that comes from the steel mill, if it decides to impose tariffs, a distinction he said could make a big difference.
"We appreciate the president is supporting the American steel industry, but for whatever action he takes to be effective, he needs to include fabricated steel," Raff said. "The effect will be easily subject to circumvention from offshore fabricators, people will be able to buy steel at a tariff-free price, transform it into fabricated steel, and be able to import assemblies or components below the cost of domestic fabrication. That situation renders the idea of these tariffs inneffective if the administration doesn’t include fabricated steel."
While Hornig believes the steel prices could impact individual projects on a micro level, he is more concerned about what it could mean for the macroeconomy when combined with other actions that have created uncertainty.
"The economy is moving along, but interest rates are going up, and the stock market has tremendous volatility," Hornig said. "All of these things individually don’t put you into a recession, but the combination of factors, the rising interest rates, increased steel prices, trade wars, geopolitical issues, does it all just come together and that turns us into a recession? It would be most unfortunate, because the underlying economy looks strong. That’s what keeps me up at night."