How Tariffs and Labor Shortages Will Thwart Housing Production
New federal policies have already impacted deal flow. What's next?
Construction costs have risen 30 to 50 percent since 2020, depending on the location and asset class, according to the National Association of Home Builders. And multifamily builders are facing the prospect of a new 25 percent tariff on building materials from Canada, Mexico and China next week.
That’s on top of a 25 percent tariff on steel and aluminum imports from all countries that went into effect earlier this month and the expected deportation of 1.7 million to 1.8 million undocumented construction workers, according to figures from the Urban Institute.
“We have already seen some impact from these policies in the form of reduced deal flow,” said Matt Silvers, vice president at Project Management Advisors Inc. “A lot of that slowdown has to do with the cost of debt, but adding tariffs and removing a major source of affordable labor will absolutely increase construction costs.”
Despite delivery of more than 530,000 new units in 2024, vacancies remain in the single digits, and construction activity fell 40 percent by the end of the year to just 230,000 new starts, the lowest level since 2012, according to Cushman & Wakefield. About 609,000 units are underway, but fewer multifamily deliveries are expected over the next three years due to continued high interest rates and escalating building costs.
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Higher construction costs are also trickling down to tenants. Apartment rents are 33.4 percent higher nationally than before the pandemic but were flat throughout 2024. Now rents are rising again.
“You can see some of that just in the apartment prices in New York, which rose 6 percent in the last month or so,” said Tim Bodner, partner and deals leader for PwC’s Global & U.S. Real Estate Practice.
The NAHB estimates that of the $204 billion worth of goods used in the construction of new multifamily and single-family housing in 2024, $14 billion or 7 percent was imported. This included most materials used in residential construction, including steel and aluminum, which already had a 14.5 percent tariff. The 25 percent tariff Trump imposed earlier this month boosts it to nearly 40 percent.
The tariff cost factor
Clay Landers, chief construction officer for Cortland, a national multifamily developer-operator, noted his company’s analysis of the impact of two consecutive 10 percent tariffs on China added 2.04 percent to the company’s average unit’s direct costs. The reciprocal tariff set to take hold April 2 would introduce 2.15 percent of additional spend.
Despite tariffs, the lumber index has remained relatively stable, Landers said. That, coupled with a recent boost of U.S. Forest licensure, is expected to improve domestic availability. The tariff on metals, however, may disrupt supply chains, causing builders to explore markets other than just Canada, he suggested.
“It’s unclear how this will affect per-unit building costs or rental rates, but if the situation becomes permanent, the market will adapt,” Landers contended.
Pete Mendonez, co-founder, president & COO of PearlX, which installs solar and battery storage systems in multifamily projects, said the cost of a normal solar project will rise 10 percent to 20 percent due to the tariff on aluminum, increasing the cost of solar modules 2.0 cents to 3.0 cents per watt.
Unrealistic expectations
President Donald Trump believes tariffs on imported products will force manufacturers to onshore production and has set a goal of producing 80 percent of all products used domestically.
But this is an impossible target due to the timeline to build manufacturing facilities and the shortages of domestic resources and labor, contended Dr. Walter Kemmsies, an economist & president of the Kemmsies Group, a forecasting and real estate strategic advisory firm.
“Even in China, they can’t build something with 100 percent Chinese inputs,” he said.
He also noted that it takes three to four years to build a manufacturing plant: Two years to decide and do a study and another one to two years to build it. So even if a new plant is started today, it would be time for the next election when these plants become operational.
Deportation policy and housing costs
Construction interests have warned that if Trump makes good on his pledge to deport all undocumented immigrants, the loss in manpower would slow new development production and drive up costs.
NAHB, which considers foreign-born workers, regardless of legal status, “a vital and flexible source of labor” for the housing industry, reports the housing industry is already short an estimated 400,000 workers. Undocumented immigrants fill 30 percent of trade jobs and are a significant part of the construction force, especially in border states.
Over the past few years, builders have responded to the lack of housing affordability by building smaller units that are price competitively with existing homes in the marketplace, noted Joel Berner, senior economist at Realtor.com. But deportations will make that more difficult.
“Builders’ ability to deliver this kind of much-needed, lower-cost inventory is at risk due to the policies of the current administration,” Berner said. “Mass deportation threatens to shrink the already undersupplied construction labor market and forces builders to employ workers with less training and experience or those who can command higher wages.”
In either case, the cost of labor and lost time will increase costs that will be passed along to buyers, making the new inventory more expensive.
The U.S construction industry relies on immigrant labor because educational institutions are not cultivating a next generation of skilled tradesmen to meet industry needs, Mendonez said
The cost of uncertainty
Trump’s policies have created uncertainty and catapulted the nation into a “wait-and-see” economy, Kemmsies noted.
“There’s a good chance that, with the tariffs imposed on things coming from Canada and Mexico, whatever you thought it was going to cost you to build a house or an apartment building, think again,” he said. “If I’m a builder, I’d be very cautious until the tariff situation settles down.”
That wait-and-see dynamic makes it hard for people to plan projects because “they just don’t know where all this going,” Bodner noted.
“Once there’s more clarity around exactly where it’s going and the impact on cost of building materials and labor, people will figure out how to run their businesses inside that context.”
Mendonez warned that the greatest impact is in regional markets expecting a rise in construction activity.
Los Angeles, for example, is expecting significant demand for construction labor and building materials, such as steel and concrete in the coming months, and is making changes to expedite construction-related wildfire recovery, Mendonez noted.
He also pointed out that higher construction costs will have the greatest impact on the most vulnerable renters by reducing or eliminating affordable housing production.
“The margins in affordable housing are already very thin, and if you hit them any harder, it just becomes impossible,” Mendonez said.
Will deregulation offset tariffs?
There are hopes that Trump’s deregulatory policies could lessen the impact of tariffs on building costs.
“Industry groups have been very vocal about the costs of regulation, particularly those related to zoning,” said Brad Dillman, founder of Florey Street Advisors, which focuses on multifamily investment. “Indeed, there has been a long and successful crusade to eliminate single-family zoning, reduce the impact of local ‘public goods’ on home prices (e.g. school choice), and densify suburbs,” he continued.
Dillman noted that federal, supply-side regulatory changes are likely to involve the sale of federal lands or improving the cost of doing business through tax incentives.
“Multifamily developers are already getting more bullish based on the potential for the administration to reinstate 100 percent bonus depreciation for goods,” Dillman said.
This deduction would allow business taxpayers to deduct additional depreciation for the cost of qualifying business property beyond normal allowances. He also believes that tax cuts, like the last Trump Administration’s Tax Cuts and Jobs Act of 2017, will come later this year and offset the current uncertainty in markets.
Bodner also noted that federal deregulation could involve timber cutting on federally controlled lands.
The Fed’s likely reaction
In order to create more housing supply, the cost of capital has to come down, Bodner said. Therefore, housing executives are closely watching how the Federal Reserve will react to the tariffs, which are likely to be inflationary, and to other uncertainties.
“The way I think markets think about tariffs is: if this is a one-time price adjustment, it will not cause inflation to continue above a benchmark level into the future, but to the extent that this turns into a trade war, that would create sustained inflation,” Bodner continued. “And that would be a problem from the perspective of the Fed. If it sees sustained inflation, that will put it in a challenging spot where it would potentially have to raise rates.”
The Fed does not meet again until May 6 and 7, but the stock market rebounded on Monday following the president’s signaling that the April 2 tariffs could be narrower than originally planned.
Building in resilience
While the tariffs will be a challenge, they may also be an inflection point for the industry, suggested Charles Johnson, president & CEO of Johnson Consulting and chair of the World Trade Centers Association Real Estate Member Advisory Council.
“Tariffs may raise costs and rattle global supply chains, but they may also create an opportunity for the U.S. construction industry to focus on long-term resilience against future economic and environmental disruptions,” Johnson said.
Shifting reliance on imports to domestic materials production and sourcing strategies will create more U.S. jobs, fortify local supply chains and enhance the industry’s ability to meet demand cost-effectively with regionally sourced materials.
Johnson stressed, however, that the industry will need to address workforce gaps with investment in construction training and upskilling programs, to build a resilient and adaptable labor force. He also said that innovation in materials sourcing and workforce development will be critical to offsetting higher building costs and mitigating new challenges.
