There have been extensive studies on how Trump's proposed tax and trade policies could potentially influence the economy. But a more direct question arises - how might these policies actually change the landscape of Commercial Real Estate (CRE)? For instance, what will be the effect on construction activities?

Unraveling the Uncertainties of Trump's Policies on CRE

Tariffs and Their Impact on Construction Costs

An increase in the cost of materials due to tariffs indeed makes construction more expensive. The proposed 25% tariff on Canada and Mexico is expected to last until there is an end to drug trafficking and migrants. Brian Clement, senior vice president and head of acquisitions at LBX Investments, stated that suburban multifamily construction projects might be most affected by tariffs on Canadian imports as they have a greater proportion of wood frame deals and a high reliance on lumber from Canada. Currently, the spot price of lumber is $579 per thousand board feet. During the pandemic, prices even reached nearly $1,500. With an additional 11% tariff, the price is still significantly lower than its recent peak. Similarly, during Trump's first term, he significantly raised tariffs on goods from China.

This shows that while tariffs have the potential to increase construction costs, the current market conditions and historical precedents provide some context. It is not a straightforward situation where costs will skyrocket overnight.

The Potential Deportation of Workers and Its Consequences

Immigrants play a crucial role in the construction industry and help keep costs relatively low. Raul Gastesi, partner and co-founder of the law firm Gastesi Lopez & Mestre, emphasized this point. However, the potential deportation of workers could drive up the cost of labor, thereby increasing the cost of construction and the purchase of real estate. Florida-based construction industry attorney Justin Zinzow noted that an estimated 13% of the construction industry could be affected. While it is a hot-button topic, he doesn't believe it will have the negative impact being exaggerated in the mainstream. Many states, like Florida, have strict immigration laws.

Ryan Dossey, co-founder of brokerage SoldFast, recalled remodeling properties in Pensacola, Florida in 2023. When Governor Ron DeSantis announced a law making it a felony to give a ride to an undocumented worker, it created uncertainty. He saw entire renovation companies move north to Georgia. Clement also pointed out that 15% to 25% of the U.S. construction workforce consists of laborers without permanent legal status, and some Sunbelt markets have a higher proportion in the construction industry.

The Possibility of Higher Inflation and Its Ripple Effects

If higher inflation occurs, it could lead to higher interest rates from the Fed, which in turn would influence the shorter end of Treasurys and construction and bridge loans. This is a complex and uncertain area. After the pandemic, it seems unlikely that the Fed would wait too long to address inflation, potentially resulting in a lower cap on how high rates would go.

Michael Vardaro, managing partner of construction law firm Zetlin & De Chiara, pointed out that the impact might not be evenly distributed. In residential construction, it could be a more significant issue, but for large projects where construction is highly sophisticated and workers are highly skilled, it might not be a major problem. The deported workers are not typically in the labor unions and not involved in that type of work.

In conclusion, while there are potential impacts from Trump's policies on CRE, the actual effects are complex and depend on various factors. It is essential to consider historical precedents, market conditions, and the specific nature of different construction projects.