Trump’s Tariffs Would Upend Construction Material Costs, Industry Says

After enduring several years of erratic market conditions and trends, construction industry leaders are hoping President Donald Trump is just bluffing on tariffs.

Threats of additional duties on imports from both friend and foe alike have builders wondering where they will get vital supplies such as Canadian timber and steel or Chinese drywall.

Analysts were enthusiastic about the direction the construction industry was headed at the end of 2024, with stabilizing inflation and the expectation of modest interest rate cuts. Now, the supply chains seem to be already disrupted on both sides of the border with Canada, while dreams of a building boom in New York City are on hold.

The tariffs were on track to be imposed by March 4, according to the Trump administration. That had not changed by the time Commercial Observer went to press Feb. 28.

There are some examples of this stick-and-stick strategy working for the administration.

Apple announced Feb. 24 that it would invest $500 billion in the U.S. in the next four years, including for a massive factory in Texas for artificial intelligence servers — all in the name of avoiding tariffs on products made in China.

The move could create 20,000 U.S. jobs, but whether the $500 billion investment will provide long-term savings by avoiding tariffs is not clear. 

“Whether the tariffs are around three to six months from now, and are these tariffs really coming, and what kind of deals will be made, that’s the thing I’m watching most,” Carlo Scissura, CEO of the New York Building Congress, told Commercial Observer. “This is a moment of uncertainty for the building industry but also with opportunities for future-looking investments, so we’re keeping our eyes open.”

For better or worse, builders should be fully prepared for prices to increase on some level.

“I think we’re going to be looking at steel prices and other things that can be purchased or produced in the U.S., but the reality is that there are still going to be things that are coming from overseas, and if that’s going to add significant amounts of dollars, we have to be really vigilant about that,” Scissura said.

Developers and contractors will be most severely impacted by the 25 percent tariffs on imports from Mexico and Canada — both of which had not been implemented as of Feb. 28 — especially those with work contracts already in place with fixed prices, according to Margaret Rabba, vice president of engineering and construction at Morningstar.

“A lot of these heavy infrastructure projects are bid on by price of the contract, and so it just brings uncertainty to the mix,” Rabba said. “I would say contractors are probably taking a deeper dive into their contracts right now and seeing what risk they’ve actually absorbed and what can be passed through. … But we assume that there’s just going to be a lot of renegotiating and a lot of open dialogue with owners, saying, ‘What are we willing to renegotiate here? What’s going to fall on my plate?’ But it is a challenge. There’s not a whole lot of margin in a lot of these projects.”

Morningstar believes projects that aren’t yet under contract could be deferred or suspended, while lenders could increase the amount of short-term debt that they issue while delaying collections of payments in consideration to construction and machinery firms seeing fewer gains.

Rabba foresees some economic weakness in the construction industry if the tariffs become a prolonged reality. That scenario would become more likely if the United States’ trading partners impost retaliatory tariffs, as Canada and Mexico threatened to do in early February.

“I know a lot of the housing associations, and Canada as well, have come to Trump and said, ‘We are looking for more affordable housing, and here we are jacking up the prices of lumber and steel, necessary materials that we need,’” Rabba said. “So it’s not something that anybody wants to be dealing with at this point, especially when housing is at the top of the political agenda.”

While most economists agree the burden of the tariffs will be shouldered by the American consumer in the form of higher prices, Canadian businesses are also finding themselves scrambling to avoid production cutbacks and get products to alternative buyers, according to Rabba.

But rerouting those materials to other nations will not be easy without established supply chains. For Canadian manufacturers, no export route beats simply trucking goods over the 49th parallel or across the Great Lakes.

Average inflation on construction material stabilized in the fourth quarter of 2024 with a rate of 1.11 percent, not far from the average rate of 1.12 percent logged in the previous two quarters, according to a report from construction management firm and consultancy Rider Levett Bucknall (RLB). That’s better than the much higher year-over-year average inflation of 4.69 percent, compared to 5.19 percent recorded five years ago.

“The promise of potential reciprocal tariffs across a variety of areas can be quite intimidating, but we’re not seeing general contractors immediately come back for price increases. We’re not seeing suppliers immediately come back and raise pricing,” Chris Willis, the Nashville office leader for RLB, told CO. “I think at the moment the market is very much kind of watching what’s going on. There are things that companies and organizations can do to plan for it, to understand what your exposure is.”

Exposure to risk can depend on location, such as U.S. firms operating in the South having less exposure than firms in Northern states, which carry a potential  for increased exposure to tariffs on Canadian lumber, according to WIllis.

In regions with higher exposure to import taxes, Willis recommended construction firms get prepared.

“One method that you might look at is: Can you change that supply chain now, or can you buy it out?” Willis said. “Can you spend the cash now, get the supplies on site, deal with warehousing stuff, and then not have to worry about tariffs going up in six months time or whatever it might be?” 

Inflation, however, has been the biggest driver of price increases in the construction industry over the last two presidential administrations regardless of tariff levels, according to RLB. The combination now, though, of inflation, labor shortages and the current tariffs have created a freeze in the building pipeline.

Where prices could end up is difficult to predict, according to Phillip Ross, accounting and audit partner at accounting firm Anchin, who said domestic suppliers could increase prices to closer to the cost of imported products. But either way, price increases could be anywhere between 10 and 25 percent, just like the tariffs themselves.

Construction firms will need to protect themselves against spending more on materials than they’ll get back through the job by signing requirements contracts in which the entire project is split up into smaller tasks, or a time and materials contract in which they would be compensated for skyrocketing costs.

Any higher costs will be passed along to the hiring firm, which may choose to avoid those costs by not building at all.

“I think [developers] should be much more concerned about tax planning now, because those could be untapped sources to get additional funding and save money,” Ross said. “Maybe there will be buying opportunities out there for materials and, if you go through all the potential cash sources and you use them to the fullest extent, it’ll put you in the best position to weather this storm.”

New York’s 485x tax incentive — the 421a replacement that offers a break to developers that focus on affordable housing — is one such option for offsetting some of the increases in cost from tariffs, Ross said.

“At the end of the day, the consumers are paying for it,” developer Miki Naftali of the Naftali Group said at a Feb. 26 Commercial Observer forum about the Brooklyn market. “No one is here building anything just to lose money. Rents are going up, sales prices are going up, and the consumer is paying for it. That’s the real story behind it.”

Mark Hallum can be reached at mhallum@commercialobserver.com.