Tariffs, Construction Costs, and the Looming Renter Supply Crisis

The U.S. multifamily housing market is on the brink of a seismic shift. A perfect storm of tariffs, inflation, and supply chain bottlenecks is tightening housing supply, driving up rents, and creating a window for investors to capitalize on undervalued markets. While the broader economy grapples with the fallout of trade policies and material price surges, certain cities are emerging as resilient pockets of growth—offering affordable entry points and demographic tailwinds that could fuel a rental surge in the coming years.

The Tariff-Driven Perfect Storm

Since 2023, U.S. tariffs on construction materials have escalated dramatically. Steel and aluminum tariffs now sit at 25%, while softwood lumber tariffs on Canadian imports are set to rise from 14.5% to 34.5% by late 2025. These measures, framed as national security tools, have instead become a tax on housing affordability. The National Association of Home Builders (NAHB) estimates that tariffs have added $10,900 per home to construction costs since 2023, with multifamily projects—already operating on thinner margins—bearing the brunt.

The ripple effects are clear. Construction material prices have surged 34% since December 2020, far outpacing general inflation. Labor shortages, exacerbated by restrictive immigration policies, compound the problem. The result? Delays in project timelines, canceled developments, and a shrinking pipeline of new units. By 2026, the U.S. housing market could face a shortfall of 1.2 million units, according to S&P Global Market Intelligence.

Undervalued Markets: The New Frontier

Yet within this crisis lie opportunities. Certain multifamily markets are bucking the trend, combining strong demographic growth with affordable entry points. These cities are poised to outperform as supply constraints push rents higher.

1. Tucson, Arizona
2. Why It Stands Out: Proximity to the University of Arizona and a 1.6% population growth rate in 2024.
3. Data: Average price per unit (PPU) rose 131.4% to $307,287, yet occupancy remains at 92%.

4. Headwinds: Tariffs on lumber and steel have slowed construction, but the 2,441-unit pipeline suggests resilience.

5. White Plains, New York

6. Why It Stands Out: Spillover demand from New York City and a 1.4% employment growth rate.
7. Data: PPU hit $389,786 in 2024, with 6,885 units under construction.

8. Headwinds: High costs and tariffs could delay projects, but proximity to Manhattan ensures long-term demand.

9. Madison, Wisconsin

10. Why It Stands Out: Strong healthcare and education sectors, with a 1.8% employment growth rate.
11. Data: PPU increased 38.6% to $154,100, with 5,008 units in the pipeline.

12. Headwinds: Rising material costs may pressure margins, but affordability and stability make it a safe bet.

13. Central East Texas

14. Why It Stands Out: Affordable land and proximity to Dallas-Fort Worth and Austin.
15. Data: 1.6% employment growth and a 55.1% PPU increase to $132,642.

16. Headwinds: Tariffs on lumber could strain developers, but the region's low entry costs offset this risk.

17. Knoxville, Tennessee

18. Why It Stands Out: 1.8% employment growth and a 96% occupancy rate.
19. Data: PPU rose 29.2% to $270,948, with 4,575 units under construction.

20. Headwinds: Rising costs may slow development, but the city's economic fundamentals remain robust.

21. North Central Florida

22. Why It Stands Out: Proximity to Orlando and Jacksonville, with 3,616 units delivered in 2024.
23. Data: PPU increased 18.4% to $186,715, with a 94% occupancy rate.
24. Headwinds: Tariffs on lumber could delay projects, but the region's affordability and growth make it a compelling play.

The Investment Thesis

The key to profiting in this environment is to target markets where demand outpaces supply. Tariffs and rising costs are slowing construction, but they are also creating bottlenecks that will drive rents upward. Investors who act early in these undervalued markets can lock in assets before the next rental surge.

For example, Tucson and Madison offer relatively low PPU compared to national averages, making them attractive for value-add strategies. White Plains and Knoxville benefit from strong employment growth and proximity to major metro areas, ensuring long-term rental demand. Meanwhile, Central East Texas and North Central Florida provide affordability and scalability, ideal for developers seeking to capitalize on Sun Belt migration.

Risks and Mitigation

While the outlook is bullish, risks remain. Tariff hikes could further delay projects, and labor shortages may persist. However, these markets' demographic strengths and affordable entry points mitigate these risks. Investors should prioritize markets with diversified economies and strong job growth, while hedging against material cost volatility by partnering with local suppliers or using alternative materials.

Conclusion

The U.S. multifamily market is at a crossroads. Tariffs and construction costs are tightening supply, but they are also creating a rare opportunity for investors to acquire assets in undervalued markets before the next rental surge. By focusing on cities with strong demographics, affordable entry points, and resilient fundamentals, investors can position themselves to benefit from a sector poised for long-term growth. The time to act is now—before the perfect storm turns into a full-blown crisis.