How Looming Construction Cost Hikes Will Hit Affordable Development

By early 2025, affordable and workforce housing developers were grappling with myriad issues impacting construction costs: inflation, high interest rates, a supply chain recovering from the pandemic, permitting delays, burdensome regulations.

That picture got more complicated by the Trump administration’s wide-ranging introduction of tariffs. While most are set to begin on April 2, a 25 percent U.S. tariff on imports of steel and aluminum from all countries took effect March 12. These tariffs could impact construction costs significantly; more than 70 percent of imported softwood and nearly one-third of gypsum come from Canada and Mexico, respectively, according to the National Association of Home Builders.

Tariffs’ unknown variables

Tom Tomaszewski, immediate past NAHB Multifamily Council chair and president of The Annex Group, said that price increases are expected, but ascertaining how much more developers will pay is a balancing act. “We just really don’t know,” he told Multi-Housing News. “The difficulty for us is all the unknowns.”

Amplifying those unknowns were the moving parts that characterized the rollout of the tariff plans in February. Most start dates got pushed back to April. “Nobody wants to see more tariffs and increased costs, but kicking the can down the road 30, 60 days or whatever it may be, is not entirely helpful to actually moving our projects forward,” commented Paula Cino, vice president of construction, development, land use & counsel at the National Multifamily Housing Council.

She added that cost increases will be particularly impactful on affordable housing. “So many of those kinds of projects are really on the cusp of viability,” she said. “Even a marginal additional cost or marginal price uncertainty or construction uncertainty can undermine the whole deal.”

The combination of tariffs, a still-recovering supply chain, higher interest rates and stringent new immigration policies could mean a “perfect storm” for the industry, suggested Barry LePatner, founder of LePatner & Associates and a construction cost expert. That storm could boost construction costs 4 to 6 percent by the end of this year and produce additional costs hikes in 2026.

“Construction utilizes about 50 percent of steel consumption and 25 percent of all aluminum consumption,” LePatner noted. “When you put tariffs on those items alone, you’re going to see increases in material costs, and it’s going to impact every project, not just affordable housing.”

He added that tariffs on Canadian softwood lumber, which already has a 14½ percent duty rate, could reach almost 40 percent if the April 2 tariff kicks in. Steel mills in the U.S. have had declines in production and will have trouble meeting increased demand. That could lead to material shortages and project delays, further increasing prices.

Some experts are concerned that it’s unclear how high those increases might go. “We’re just holding our breath and just keep moving along and hope that whatever contingencies we’ve got built into our development plans will cover any of these unexpected project expenses,” said Scott Ewing, vice president of construction at Dominium.

Especially under the circumstances, one important step is to review contract terms and make sure everyone—including trades and owners—is on the same page regarding tariff price changes, advises Christopher Kelly, partner & member of the architecture and engineering and construction groups at Anchin.

“Active contracts are getting expedited and future contracts are getting pushed out further into the future due to uncertainty,” he noted.

On existing contracts, some clients are hedging their bets by pre-purchasing and storing materials. “On future contracts you don’t really have that option, so it increases hesitation by owners and contractors,” Kelly said. “A project won’t make any sense if a subcontractor can add 25 percent to a material cost. Another won’t be interested in maybe pursuing that project and know that they have that additional cost.”

Vendors for some of Dominium’s wood-framed projects plan to absorb the tariffs or lock in lumber prices, Ewing reported. “We’ve got a couple of projects where they have agreed and said, ‘If you can sign right now, we can lock this in and guarantee it.’ But who knows what’s going to happen on the next six projects.”

How project delays impact costs

A common headache among multifamily developers post-pandemic has been the lingering problems with procuring electrical components, including switch gears and transformers, as well as getting power connections at job sites.

In NMHC’s most recent quarterly construction survey, released in December, 30 percent of respondents reported experiencing delays with specific materials. That’s a 21 percent in the previous quarter. The report states that survey participants placed heavy emphasis “on delays related to electrical gear.”

The NMHC survey also showed that members were experiencing high levels of project delays. In the year-end survey, 95 percent of respondents said they experienced construction delays caused by permitting issues. It was the highest value recorded since the survey’s inception in March 2022 and up from 77 percent in June.

“I guess part of it is maybe just shortages of municipal staffers and people to go out and do the inspections and so forth, but there are other issues impacting on that,” Cino told MHN. “It’s a lack of professional services and constantly shifting regulatory framework, particularly in the most recent period, where we were seeing a lot of new standards come down the pipeline.”

A decade ago, it would take 16 to 20 weeks to get all the switch gear for a development, Ewing recalled. Now it takes at least a year. To prevent delays, Dominium picks an electrical contractor right away and makes purchase agreements immediately after closing on a project.

Delays also occur during the wait for backlogged utility providers to bring power to the site. “We need to get power turned on so we can start checking out all the HVAC equipment and getting our final inspections,” Ewing said.

Roers Co. also orders parts early in the typical 18-month development process. But, as of late February 2025, it was still waiting for electrical components for two buildings completed in January, reported Brian Roers, co-founder of the Plymouth, Minn.-based firm.

Regulatory burdens on operations

One of the biggest challenges the housing industry has faced in recent years “was the onslaught of regulatory burdens,” according to Cino, such as rules regarding appliance efficiency, furnaces and water heaters. She also expressed hope for relief with the new administration.

“We know the Trump administration has voiced a real appetite for reducing the regulatory burdens and is exploring a whole host of those past administration policies,” she said. It’s a step in the right direction, but the industry needs standards specified so builders can make design, purchasing and construction decisions.

Industry groups are watching to see whether regulations dropped by the federal government get picked up by state and local jurisdictions. Regulation imposed by all levels of government account for an average of 40.6 percent of multifamily development costs, according to NMHC and NAHB research.

A new study released by NMHC and the National Apartment Association takes a broader look at the regulatory burden at state and local levels. It found that some overly stringent operational regulations—such as source-of income, just-cause eviction and resident screen laws—impact costs, revenues and, ultimately, housing supply. They often increase costs for property owners and can lead to higher rents and reduced investment in new housing.

“We know there’s a ripple effect when the regulatory burden is on operations versus construction,” Cino stated. “It nonetheless has an influence how much we wind up building in that jurisdiction.”

Grappling with high rates, capital costs

“Interest rates have remained high. So, the cost of financing is still very high and is an incredible challenge,” Tomaszewski told MHN. Multifamily developers hoping for a bit of relief following the latest Federal Reserve Open Markets Committee meeting were disappointed. The central bank elected to keep interest rates the same, with the current federal funds rate of 4.25 to 4.5 percent remaining unchanged since December. The decision comes amid reports of a strong yet slowing economy, uncertainty about inflation and concerns about tariff impacts.

Buying land is a problem because of the pricing disconnect between sellers and buyers. “With the cost of capital and financing, there’s essentially a math equation,” he said. “When the land is too expensive, it just does not work.”

Tomaszewski added that higher interest rates and cost of capital have deeply affected the affordable housing industry. Cobbling a deal together becomes ever more complicated.

“Five or six years ago we could have three or four capital sources and now we’ve got up to 10 to really get it to work,” he said. “At the same time, we’ve got these programs where we’re getting some soft funding that could be defunded in the future or are up in air.”

Seeking out public-private partnerships in municipalities that want affordable housing makes a big difference. The Annex Group has three active projects in Lincoln, Neb., which is aiming to add 5,000 affordable units over the next 10 years: “They have really gotten behind the private sector,” Tomaszewski said. “I look to them as being a success story.”

While both development firms use Low-Income Housing Tax Credits for their affordable housing projects, Tomaszewski said more state and local housing tax credits are being offered, notably payments in lieu of taxes and tax increment financing. The firm is tapping into public-private partnerships to finance affordable housing with private activity bonds and “hitting that 60 to 80 percent Area Median Income, which has traditionally been an underserved market.”

In addition to LIHTC and TIF, Roers Co. often works with local housing authorities to get property tax exemptions. “You’re looking for whatever tools you have in the quiver to build it up and it’s gotten more challenging,” Roers said. The company’s portfolio is about 50 percent affordable housing but they are aiming to increase that to 60 or 65 percent.

The firm is currently active in the Phoenix market, where it has eight projects in development: “They’ve been a pretty good market for letting the different tools work,” Roers reported.