Tariffs Impact on Commercial Real Estate

An April 10, 2025 article in The National Observer suggests that tariffs will likely have an indirect—though noteworthy—impact on commercial real estate, at least in the short term. While uncertainty around tariffs has already influenced the pricing of construction materials, the broader effects on commercial real estate may take longer to surface. The 90-day pause on tariffs for most countries—excluding China, which faces a steep 125% tariff—offers temporary relief, but concerns remain.

Should the economy tip into a recession, as some economists have warned, dealmaking and activity in the commercial real estate space are expected to slow. This would largely be due to uncertainty surrounding replacement and construction costs, which could hinder both new development and ongoing projects. The current economic instability is likely to impact future construction timelines and may also delay lease negotiations for developments already in progress.

As the reshoring of jobs to the United States gains momentum, there’s a growing need to ensure adequate housing. Developers are increasingly exploring office-to-residential conversions in urban centers across the country, along with new housing developments nationwide, to meet this demand.

CRE Indicators

On a more optimistic note, Avison Young reported that first-quarter 2025 leasing activity reached its highest level since 2018. Additionally, availability rates have dropped to their lowest point since 2020. Gordon Ogden, Executive Managing Director at Bradford Allen’s New York office, noted that the “flight to quality” trend has expanded beyond Class A buildings to include well-located, high-quality Class B assets. While elevated vacancy rates and macroeconomic headwinds continue to challenge lower-tier properties, these developments suggest the market may be on the path to recovery.

Bringing this closer to home in Albuquerque, the demand for Class A office space remains strong, as tenants continue to prioritize quality. Class B property owners have also made strategic upgrades, resulting in steadily declining vacancy rates in that segment.

A Crossroads

However, consumer fatigue remains a concern. With consumer spending making up nearly 69% of U.S. GDP, the mounting financial strain on households could have far-reaching implications. Recent data points to increasing stress among consumers, raising questions about how many families will manage basic expenses — such as groceries — during the upcoming summer months when school meal programs are unavailable.

In conclusion, the commercial real estate sector stands at a crossroads. While there are encouraging signs in leasing activity and demand for quality space, challenges persist—from tariff-related cost pressures and economic volatility to consumer fatigue. The months ahead will be critical in determining whether the sector can weather these headwinds or will need to adapt further to evolving economic conditions.