Developers adapt to tariffs and construction uncertainty

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While companies are feeling uncertainty over President Donald Trump’s tariffs, some housing developers shared their experience with navigating the unknown.

On the campaign trail, Trump promised tariffs on Mexico, Canada and China for a range of reasons such as halting illicit drugs and illegal immigrants crossing U.S. borders. As of publication, the president has eyed imposing tariffs on countries as high as 50% – and 145% for China – but it’s unclear when tariffs will set in as they have been postponed often.

Although tariffs could spur suppliers and construction players to buy American products first, some products can only be bought internationally, leading housing builders to either eat the cost or pass it down to the end user. Construction faces a labor shortage, and developers are dealing with high interest rates, adding to the nervousness in the building environment.

Ugo Nwagbaraocha, the president of Diamond Discs International and board vice president of the National Association of Minority Contractors, said he hadn’t seen this level of uncertainty in his more than 30 years of experience in the construction industry. Not being able to see ahead makes it difficult for long term planning and investments, he added.

“Diamond Discs International is a primary vendor of safety equipment and power tools to some of the nation’s largest utilities and infrastructure contractors,” Nwagbaraocha said. “Our business is well positioned in this growing essential industry, but the current administration’s continued escalatory increasing tariffs are detrimental to our firm’s long-standing business relationships and contractual obligations,” he added.

“As president of NAMCWI (Wisconsin Chapter), our members have voiced high levels of concern and frustration regarding the current climate of anticipated rising costs of necessary construction materials and supplies,” he continued.

Developers use careful planning, but some things can’t be predicted

Nate Helbach, a Madison housing developer who specializes in mass timber projects, said in a company letter that the demand for housing hasn’t gone down in the Madison market, backed up by strong rent growth and low vacancy rates.

In April, Helbach’s firm Neutral placed the final cross laminated timber panels on 517 W. Main St., a 33-unit multifamily project in Madison.

“By adopting careful risk management practices at the outset of every project, using conservative financing and procuring materials in advance, we position ourselves to navigate volatility and build long-term sustainable value,” he added.

The firm also reduced its exposure to tariffs by pursuing sustainability certifications and materials from U.S.-based suppliers, Helbach said.

“Four example, our Neutral 1005 N. Edison St. project in Milwaukee is targeting Living Building Challenge certification,” Helbach continued. “This standard requires most materials to be sourced locally: at least 20% within 500 kilometers, another 30% within 1,000 kilometers and an additional 25% within 5,000 kilometers,” he added.

Neutral will continue looking for domestic alternatives and assessing risks for imported components with projects that are starting and are in planning, Helbach said. Mechanical systems, appliances, façade assemblies, mass timber and specialty interior finishes are some areas the firm is watching, he added.

For the Edison, those materials aren’t expected to arrive at U.S. ports until spring 2026 and tariffs are applied upon entry, Helbach said. But it’s not clear whether mass timber will be exempt in the 13 months between April and the expected delivery window, he added.

“That said, policy continues to shift almost daily, and it remains challenging to accurately predict where things will stand a year from now,” Helbach noted.

Rapidly changing real estate market still offers opportunities

Richard Rubin, a southern California-based developer working on adaptive reuse projects to create workforce housing, said the adaptive reuse practice itself hasn’t been hit as hard by extra materials taxes compared to ground-up projects.

“Of course, your building and material use should be infinitely less in an adaptive reuse project compared to building out of the ground,” Rubin said.

Empty commercial buildings abound after COVID-19 shifted workers away from the office, leaving more potential adaptive reuse projects available in the market. The trend is picking up in Milwaukee with the 100 East redevelopment and an announcement for apartments at the historic Mitchell Building.

“I don’t think anyone would have thought this lack of return to the office or alternate way of working had COVID-19 hadn’t occurred,” Rubin said, noting a similar emptying effect happened with retail properties.

“The more people look at the business case for reuse, the more it makes sense if there are going to be challenges such as commodity purchases,” Rubin said. “Not to say it’s devoid of the same issues. If you purchase a Mitsubishi elevator from Japan for example, and there’s no counter and no other countries you can get that elevator from, you’re going to take a beating on that elevator,” he added.

“It isn’t going to move the needle to the extend of your reuse project if that elevator cost $1 million and now it costs $1.3 million,” he continued. “Is there a way you can value engineer one single item and absorb a three or four hundred thousand hit? Maybe, maybe not, depending on the project,” he added.

One of the challenges for adaptive reuse is convincing regulatory bodies to approve of adaptive reuse projects, Rubin said. The developer saw wins and losses across the U.S. over the years, and noes can happen for different reasons, such as a city looking to keep commercial spaces for big box stores or tech brands. But Rubin said those looking to launch their own reuse projects shouldn’t be discouraged.

“It’s not to say that because a particular thing occurred in any given city it’s going to be like this forever,” Rubin said. “If one is patient enough and if the business case still exists, there’s nothing to stop one from effectively pursuing that,” he added.