Managing tariff risk to maximize returns for commercial real estate investors

Commercial real estate entered 2025 with optimism following rate cuts, but that optimism soured after April 2 when U.S. tariff uncertainty jolted the market, slowing deal activity and fundraising and reigniting fears around inflation and elevated borrowing costs. While there may be opportunities in specific markets, navigating this high-cost, high-volatility environment requires strategic positioning to address business risks and drive competitive returns for CRE investors. 

With 50% tariffs now on steel and aluminum, and proposed tariffs on copper and lumber, development costs are surging. Contractors are padding bids, delaying projects and revising capital improvement plans. Total construction starts dropped 9% in April, according to Dodge Construction Network, after a 4% year-over-year gain.

Financing costs are expected to remain expensive. RSM US LLP predicted two rate cuts in 2025; however, if inflation remains high we may see only one cut, in December. Rising Treasury yields are further pressuring highly leveraged deals, especially construction projects.

In response, investors are pivoting to value-add and renovation strategies, where existing assets can be repositioned or upgraded at a lower cost and with faster execution. This “buy it vs. build it” shift is evident in industrial and multifamily markets, which benefit from reshoring, logistics expansion and demographic growth.

Market volatility hits fundraising, transactions

Public real estate investment trusts (REITs) experienced significant declines after the current administration’s April 2 announcement that tariffs would increase. Industrial and lodging REITs dropped 18.9% and 16%, respectively, according to the FTSE Nareit All Equity REITs Index. Although REITs regained substantial value by the end of April, they ended the month with a 2.1% decline across all CRE sectors.

Private market fundraising also faltered. While Q1 saw nearly 200 funds raised—near historical averages—capital raised was only $31 billion, well below the $42 billion average, according to Prequin, the world’s largest private equity database. By mid-Q2, activity had slowed sharply: Just 40 funds and $11.72 billion were raised, a significant decline from Q1. Transaction volume mirrored these trends, with Q2 activity through May at 43% of Q1 levels.

Investors and investment managers are now prioritizing stability and exercising caution. Investment managers with size and strong track records are attracting capital, while first-time fund managers captured just 16.5% of 2024 fundraising, far below the historical 50%, according to PitchBook. Long-term lease assets, such as industrial, grocery-anchored retail and medical outpatient properties are drawing investor interest. Despite market shocks, fundamentals are steadier than they were in prior downturns. Multifamily and industrial oversupply is being absorbed, keeping asset prices from free-falling. Still, demand challenges persist, particularly in sectors tied to consumer sentiment.

Retail, industrial feel the tariff pinch

Tariffs particularly affect the industrial and retail sectors, where rising costs and supply chain disruptions threaten margins. Q1 2025 saw a 24% increase in move-outs, with major tenants filing for bankruptcy or closing stores. Retail vacancy remains tight at 5.5%, but could rise if inflation and cost pressures persist.

Retail giants like Walmart are signaling price hikes, which could dampen consumer spending. Higher operating costs, from taxes to utilities, threaten net operating income and rental growth. In the office sector, while return-to-office trends offer some momentum, economic uncertainty is driving tenants toward shorter leases, increasing turnover and acquisition costs for landlords.

Still, industrial assets tied to domestic supply chains are seeing long-term upside. Major onshoring announcements from Amazon, Nvidia and Kimberly-Clark hint at future demand. If construction stays subdued, limited supply could tighten markets further, benefiting long-hold investors.

Operational efficiency becomes a competitive edge

As uncertainty looms, integrating technology offers significant potential for improving operational efficiency in the real estate sector. Technology adoption should be viewed as a survival strategy.

Real estate owners and asset managers are doubling down on smart building technology such as property management software, tenant experience platforms and energy-efficient automation. Strategically outsourcing fund administration and back-office functions allows firms to scale without adding head count.

Recent U.S. Securities and Exchange Commission filings underscore this shift. In the industrial sector, a leading global company specializing in logistics real estate is using artificial intelligence to enhance supply chain visibility and implement automated systems for inventory management and order fulfillment.

In the residential and office sectors, major companies are investing in smart technologies such as automated lighting, climate control and security systems. A global company that provides data centre and colocation services is investing in advanced cooling technologies, renewable energy solutions and edge computing to meet real-time data demands. These moves improve tenant retention and streamline operations, directly supporting margin growth.

Debt pressures mount but opportunity remains

Real estate returns are getting squeezed. With $1.8 trillion in commercial real estate loans set to mature by 2026, according to NAIOP, refinancing is critical. Some firms are using asset sales or reserves to repay loans, while others are restructuring debt, extending terms or reducing principal.

Over the long term, average delinquency loan rates have been around 3.14%. The most recent reading from the Board of Governors of the Federal Reserve, from Q4 2024, showed current commercial real estate loan delinquency at 1.57%, with recent troubles concentrated in office sector loans. Banks with significant office sector exposure face ongoing challenges due to high vacancy rates, falling asset values and difficulty refinancing maturing loans.

The debt picture is stabilizing. Rates have declined from over 5% in mid-2023 to 4.33% as of May 2025. CRE loan delinquencies remain below historical averages at 1.57%, although office loans remain under pressure due to high vacancy rates and refinancing struggles.

Well-positioned managers are optimizing asset performance by renegotiating debt, slashing costs and investing in technology to preserve returns and stay competitive. Investors are being more selective and disciplined as capital seeks proven platforms and stable cash flow.