The Triple Threat of Tariffs: How Rising Costs Could Reshape Affordable Housing

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% tariffs on steel and aluminum imports (effective March 12, 2025), potential 25% duties on Canadian/Mexican goods, and 10% 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.

 

Section 1: The Tariff Trifecta Driving Up Costs in the Near Term

1.1 Material Costs: Steel, Aluminum, and Beyond

The average US construction project derives about 30% of its materials from abroad, and tariffs are already disrupting supply chains. The 25% tariff on steel and 25% duty on aluminum (up from 10% in 2018) will directly increase the cost of structural framing, HVAC systems, and electrical wiring. For example:

• Steel accounts for ~15% of some multifamily construction costs. A 25% tariff could add $250,000 to the cost of a 50-unit building with $1M in steel costs.
• Aluminum, critical for windows and cladding, has seen prices surge by 18% month-over-month since the tariffs were announced.

These increases compound existing pressures. Softwood lumber, 80% of which is imported from Canada, faces a proposed 25% tariff delayed until March 2025. Appliances, fixtures and flooring also have global supply chains with a substantial portion of these inputs coming from China.

1.2 Labor Costs: Immigration Policies Compound Tariff Pressures

While tariffs dominate headlines, labor shortages—exacerbated by aggressive immigration enforcement—are equally critical. Approximately 30% of construction workers are foreign-born, and deportations could shrink this pool by 10–15% 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 $5M in labor costs, this translates to $250K–$350K in added expenses — costs that cannot be absorbed by rent-capped properties.

1.3 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 2 weeks, down from 60–90 days pre-tariff. This volatility forces lenders to:

• Increase contingency reserves by 10–15% for construction loans.
• Demand higher equity contributions (up to 35% vs. 25% in 2022).
• Raise interest rate by increasing risk spreads by 75–100 bps to offset risk.

For a $20M project, these changes could add $1.2M in upfront costs and $400K/year in debt service, rendering marginal projects unviable.

 

Section 2: Near-Term Squeeze – Developers and Asset Prices Under Pressure

2.1 The Interest Rate Squeeze

Despite recent Fed rate cuts, 30-year mortgage rates hover near 6.5% – 7%, with tariffs threatening to reignite inflation. If core CPI rebounds above 4%, the Fed may hike rates by 50–75 bps in late 2025, further pressuring cap rates.

2.2 Distressed Sales and Price Adjustments

In the current environment, assets with near-term refinancing needs are most vulnerable. These include:

• Value-add properties: Higher renovation cost, more likely variable rate, shorter loan maturities.
• Subsidized housing: Fixed rents limit the ability to pass through rising costs.

For instance, A 150-unit apartment complex purchased in 2022 at a 4.5% cap rate may now need to refinance at 6.5%, with 20% higher operating costs.

• That results in a potential 25–30% value decline—forcing distressed sales, especially among:

2.3 A Recipe for Higher Rents in the Medium Term

The combination tariffs, reduced labor supply, increased financing costs and lower asset prices have already reduced multifamily starts which are expected to dip by 75% 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.

 

Section 4: The 3–5 Year Inflection Point – A Market Reset?

By 2028, today’s pain points could lead to a more stable market:

✅ Lower land costs: Distressed sales and stalled projects could reduce land values, easing one of the biggest cost drivers for new development.
✅ Higher rents: As supply remains constrained, rising rental income will eventually justify higher development costs and bring capital back into the market.
✅ A more sustainable market: Real estate returns will likely improve, making new deals feasible again and allowing supply to naturally increase

 

Section 5: 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:

• Cities like Houston are offering tax breaks for projects with 30%+ affordable units.
• Chattanooga’s AI-powered permit review has cut approval times from 9 months to 45 days.

🔹 Domestic material production:

• 22 new U.S. steel and aluminum mills have been announced, with 12 opening by 2026, promising a more stable domestic supply.

🔹 Modular and prefab innovation:

• These construction methods now account for 9% of new housing starts (vs. 4% in 2022), cutting costs and timelines.

 

Conclusion: Navigating the Storm

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.