Tariffs and Tight Squeezes: How Rising Construction Costs Could Spark a Rental Market Crisis—and Where to Invest Before It Does

The construction industry is in the throes of a historic materials crunch. Steel tariffs now sit at 50%, lumber costs are soaring, and aluminum prices have surged 6.2% in 2025 alone. These tariffs—designed to boost domestic production—are instead creating a perfect storm for real estate investors. With supply chains in disarray and labor shortages compounding delays, the rental market faces a pivotal crossroads: higher rents, slower development, and a reshuffling of investment opportunities. Here's why this isn't just a problem—it's a signal to act now.

The Tariff-Turned Tectonic Shift: How Materials Costs Are Upending Construction

The math is brutal. Steel prices have risen 41% since 2020, while nonresidential construction inputs are up 9% annually. Aluminum tariffs at 50% have already forced some manufacturers to halt production, and retaliatory tariffs from Canada and Mexico have worsened global supply bottlenecks. For landlords and developers, this means:
- New construction is getting pricier: Building a multifamily complex now costs 20–30% more than in 2020.
- Delays are compounding: Median planning time for commercial projects has jumped 6.5 months since 2019.
- Residential shortages are worsening: A 1.2 million-unit housing deficit could expand as builders face cost blowouts.

The correlation is stark: as steel prices rise, homebuilder stocks slump. For investors, this is a warning to avoid overexposed sectors while seeking shelter in resilient niches.

Rental Demand: A Two-Front Battle Between Affordability and Scarcity

Tariffs aren't just affecting supply—they're reshaping demand dynamics.

**The Demand Side:

• Renters are trapped between rising costs and stagnant wages: With mortgage rates near 7%, more households are forced into rentals. But higher material costs will push rents up by 5–10% in 2025.
• Regional divides will grow: Urban cores with strong job markets (e.g., tech hubs) will see rising demand, while suburbs and rural areas face vacancies as workers relocate.

**The Supply Side:

• Landlords are choosing profits over expansion: With construction costs prohibitive, many are opting to renovate existing units rather than build new ones.
• Apartment supply is lagging demand by 14% in metro areas.

The result? A rental market split between high-demand zones with rising rents and overbuilt areas with falling occupancy. Investors who miss this split could lose big.

Landlord Strategies: Playing Defense in a Cost-War

Landlords are pivoting to survive:
1. Focus on maintenance over new builds: Renovating older units to demand specs (e.g., EV charging, smart tech) is cheaper than new construction.
2. Target cash-rich renters: Apartments in high-demand areas are marketing to remote workers, gig economy employees, and students—groups with less sensitivity to rent hikes.
3. Diversify into resilient sectors: Industrial REITs (e.g., warehouses for e-commerce) and student housing (which has inelastic demand) are outperforming residential apartments.

Where to Invest: 3 Undervalued Plays

1. Student Housing:
2. Why: Universities are expanding enrollments, and off-campus housing is a must-have.

3. Pick: Companies like Education Realty Trust (EDR) or specific regional operators near top campuses.

4. Industrial and Logistics:

5. Why: E-commerce and supply chain reshoring need warehouses, even if office space tanks.

6. Pick: Prologis (PLD) or STAG Industrial (STAG), which have 95%+ occupancy rates.

7. Urban Renovations:

8. Why: Renovating existing units avoids construction costs.
9. Pick: Equity Residential (EQR) or funds focusing on “value-add” properties in cities like Austin or Seattle.

Red Flags: 2 Markets to Avoid

1. Suburban Apartments:

2. Risk: Remote work has reduced demand for commutes, leaving many 2020-era suburban complexes half-empty.

3. Office Towers:

4. Risk: Companies are downsizing post-pandemic, and new builds are economically unviable with current material costs.

Conclusion: The Tariff Tsunami Has Already Started—Act Before the Waves Hit

The writing is on the wall: tariffs are here to stay, and their ripple effects will reshape real estate for years. Investors who focus on resilient sectors—industrial, student housing, and urban renovations—can capitalize on the coming scarcity. Those clinging to suburban apartments or office REITs will drown in oversupply.

The clock is ticking. With construction costs rising and demand shifting, now is the time to pivot to assets that thrive in this new era of material scarcity.

Invest smartly—or get left behind.