Over the past week, the Trump administration has reshaped global trade dynamics with sweeping tariffs targeting imports from Canada, Mexico and China. As the CEO of a firm that provides capital to experienced CRE professionals including dozens of multifamily housing developers, and who has also owned and/or managed over 4,700 affordable housing units, I see these policies as a watershed moment for the U.S. housing market.
The confluence of 25 percent tariffs on steel and aluminum imports, effective March 12, the potential for 25 percent duties on Canadian and Mexican goods and 10 percent tariffs on Chinese products threatens to destabilize an already fragile affordable housing ecosystem.
Below, I outline how these measures — combined with persistent inflation and interest rate volatility — could create a perfect storm of near-term higher rents, asset price declines and long-term opportunity.
Materials Costs: Steel, Aluminum and Beyond
The average U.S. construction project derives about 30 percent of its materials from abroad, and tariffs are already disrupting supply chains. The 25 percent tariff on steel and 25 percent duty on aluminum (up from 10 percent in 2018) will directly increase the cost of structural framing, HVAC systems and electrical wiring.
For example, steel accounts for approximately 15 percent of some multifamily construction costs. A 25 percent tariff could add $250,000 to the cost of a 50-unit building, amounting to $1 million in steel costs.
Aluminum, critical for windows and cladding, has seen prices surge by 18 percent month-over-month since the tariffs were announced. These increases compound existing pressures.
Softwood lumber, 80 percent of which is imported from Canada, faces a proposed 25 percent tariff delayed until March 2025. Appliances, fixtures and flooring also have global supply chains with a substantial portion of these inputs coming from China.
Labor Costs: Immigration Policies Compound Tariff Pressures
While tariffs dominate headlines, labor shortages — exacerbated by aggressive immigration enforcement — are equally critical. Approximately 30 percent of construction workers are foreign-born, and deportations could shrink this pool by 10 to 15 percent in 2025 alone. The result could be a short- to medium-term increase in wages for skilled trades, with wage spikes happening if construction activity begins to recover.
For a 100-unit affordable project with $5 million in labor costs, this translates to $250,000 to $350,000 in added expenses — costs that cannot be absorbed by rent-capped properties.
Financing Costs: Volatility Scares Lenders
We are currently in a period of capital scarcity as the market has not adjusted to the interest rate increases beginning in 2022. On top of that, tariffs have injected additional uncertainty into development financing. I have heard anecdotally that contractors are now guaranteeing material pricing for just two weeks, down from 60 to 90 days, pre-tariff. This volatility forces lenders to:
- Increase contingency reserves by 10 to 15 percent for construction loans.
- Demand higher equity contributions (up to 35 percent versus 25 percent in 2022).
- Raise interest rates by increasing risk spreads by 75 to 100 basis points to offset risk.
For a $20 million project, these changes could add $1.2 million in upfront costs and $400,000 per year in debt service, rendering marginal projects unviable.
Near-Term Squeeze: Developers and Asset Prices Under Pressure
Despite recent Fed rate cuts, 30-year mortgage rates hover near 6.5 to 7 percent, with tariffs threatening to reignite inflation. If the core consumer price index rebounds above 4 percent, the Fed may hike rates by 50 to 75 basis points in late 2025, further pressuring cap rates.
In the current environment, assets with near-term refinancing needs are most vulnerable. These include value-add properties, with higher renovation costs that are more likely to be financed through variable-rate loans with shorter maturity schedules. Subsidized housing is also vulnerable because fixed rents limit the ability to pass along rising costs to tenants.
For instance, A 150-unit apartment complex purchased in 2022 at a 4.5 percent cap rate may now need to refinance at 6.5 percent, with 20 percent higher operating costs.
That results in a potential 25 to 30 percent value decline — forcing distressed sales.
A Recipe for Higher Rents in the Medium Term
The combination of tariffs, reduced labor supply, increased financing costs and lower asset prices have already reduced multifamily starts, which are expected to dip by 75 percent from their 2021 peak. With the U.S. facing a persistent affordable housing shortage, it is very likely for rents to rise in the medium term, especially in high-demand markets like Phoenix and Austin.
Will the Market Reset in Three to Five Years?
By 2028, today’s pain points could lead to a more stable market. It’s safe to expect lower land costs, for example. Distressed sales and stalled projects could reduce land values, easing one of the biggest cost drivers for new development.
We also anticipate higher rents. As supply remains constrained, rising rental income will eventually justify higher development costs and bring capital back into the market. As real estate returns improve, we’ll see a more sustainable market, making new deals feasible again and allowing supply to naturally increase
Emerging Opportunities Amid the Turbulence
Despite the immediate challenges, opportunity exists for those who can navigate this new cost paradigm. Several key trends offer a glimpse into the future. Policy incentives are one example. Cities such as Houston are offering tax breaks for projects with 30 percent or more affordable units. And Chattanooga’s AI-powered permit review has cut approval times from nine months to 45 days.
A switch to domestic material production would have a stabilizing effect. Twenty-two new U.S. steel and aluminum mills have been announced, with 12 opening by 2026, promising a more consistent domestic supply. Modular and prefab innovations also bode well for the future of affordable housing development. These construction methods now account for 9 percent of new housing starts, versus 4 percent in 2022, cutting costs and timelines.
The tariff wave of 2025 will test the resilience of the multifamily and affordable housing markets. Developers and investors should:
Right-size your capital stack: Sell over-levered assets or bring in more equity to weather volatility.
Look for opportunities to acquire at a lower cost basis: Market weakness today sets up future gains as supply-demand imbalances play out.
Embrace new building solutions: Modular construction and innovation and domestication of material sourcing could drive efficiency gains.
Advocate for policy improvements: Faster permitting, better zoning and a well-trained domestic workforce will support long-term growth.
While short-term pain is inevitable, those who adapt will find strong opportunities in the late 2020s. As supply shrinks and rents rise, the affordable housing crisis will deepen — but so will the rewards for those prepared to weather the storm.
Derrick Barker is the CEO and co-founder of Nectar, a mezzanine debt lender for commercial real estate. A Harvard graduate and former Goldman Sachs bond trader, Barker has personally owned and/or managed more than 4,700 affordable housing units and currently has investments in 27 states.