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Executive Summary: 

• President Trump’s recent executive order imposing tariffs of 25% on steel imports and 10% on aluminum imports could increase the cost of commercial real estate construction.   
• While costs vary by asset type, local market conditions and types of construction materials used, high-rise office and industrial building construction costs may rise modestly.
• Although commodity prices have fluctuated in recent years, the primary driver of higher construction costs has been a scarcity of skilled labor, particularly in metro areas with the most development activity.

Figure 1: Construction Costs vs. Metal Prices

Source: Engineering News Record, BLS, CBRE Research; 2018.

• Regardless of the potential for increased costs, the overall impact of steel import tariffs on commercial construction activity nationwide is expected to be negligible.
• CBRE analyzed the pending tariffs’ potential impact on steel prices, using historic examples and current market conditions as reported by its U.S. development services subsidiary, Trammell Crow Company. This report focuses on the impact of steel tariffs, which have a much larger effect on commercial construction costs than do aluminum tariffs.
• While results vary by local market, subcontractors are shortening the amount of time that their bids remain valid in anticipation of rising prices. Local market impact will vary based on construction component (e.g., Texas markets use more concrete and less steel in construction than does New York City) and local supply/demand dynamics.
• Some steel suppliers recently increased their bid prices for wide-flange steel shapes by $300 to $400 per ton, rebar bid prices by 5% to 8% and metal stud bid prices by 3% to 5% in anticipation of tariffs.  

Steel Pricing and Construction Costs:

• The George W. Bush-era tariffs of 2002 came when steel prices were at a 20-year low. In contrast, today’s steel prices are relatively strong, though there is still room for upward movement. Current steel prices (as measured by the iron and steel component of the PPI) remain well below the 2008 peak and the 2011 post-recession high.

Figure 2: Producer Price Index by Commodity: Iron & Steel

Source: BLS, CBRE Research, 2018.

• Prices for rebar, hot-rolled coil and other key steel products increased by about $50 per short ton in the week following President Trump’s announcement, according to S&P Global Platts.
• The price of U.S. hot-rolled band steel (HRB)—a key product for steel price benchmarking—increased by 6.7% between February 26 and March 12. The price of Chinese HRB fell by 3.2% during this period, while prices for Western European HRB were essentially flat.

Figure 3: Price Comparison by Region of Origin, Hot-Rolled Band Steel

Source: Steel Benchmarker, CBRE Research, 2018.

Potential Implications for Commercial Real Estate:

• An increase in steel prices due to the tariffs could exacerbate current cost pressures on commercial real estate developers, landlords and tenants due to higher tenant-improvement buildout costs. This, in combination with continued effects of skilled labor shortages, could cause development activity to slow unless rent growth is sufficient to offset higher costs. 
• The impact of higher steel costs will vary by product type and location. Slowdowns in construction activity could be more pronounced for product types with large steel requirements (steel-framed, high-rise office towers vs. wood-framed apartment buildings, for example).
• Canada and Mexico, which accounted for one-quarter of U.S. steel imports in 2017, are exempt from the tariffs, at least initially, which could mitigate upward pressure on pricing. 

Economic Impact of Steel Tariffs:

• President George W. Bush imposed a 30% tariff on certain steel products between 2002 and 2005. A study conducted by Trade Partnership Worldwide (TPW) found that these Bush-era tariffs led to higher steel costs, which reduced employment in the steel-consuming sectors by 200,000 jobs, representing nearly $4 billion in lost wages. For comparison, total employment in the U.S. steel-producing industry was just 197,000 jobs at that time. The impact on the overall economy was less than $30 million net (.0003% of the U.S. economy), according to a recent report from British business magazine The Economist.
• According to the TPW study, most steel-consuming manufacturers are small businesses that employ less than 500 workers. These companies tend to be “price-takers,” meaning that they have little-to-no ability to pass on the cost increases to customers, so they suffer reduced profit margins. In cases where prices were raised, U.S. steel-consuming manufacturers simply lost out to foreign competition, as their customers moved sourcing of steel-containing products offshore.
• Most economists anticipate that potential job losses stemming from these tariffs alone will be moderate, though even the best-case scenario is that more jobs may be lost in other industries for every steel or aluminum-producing job that is gained. TPW estimates that there may be a short-term bump of 33,000 metal-making jobs, which will be offset by a loss of 179,000 metal-using jobs.
• Exempting countries like Canada and Mexico and using Section 232 of the Trade Expansion Act of 1962 (to get around the World Trade Organization) complicates the analysis of how much trade retaliation the U.S. may face now and in the future as the door may be opened for other countries to use “national security” as a reason for trade restrictions. At the same time, the EU and Asian countries that may be subject to these and other tariffs have so far signaled that they will target quintessentially American products, including cranberries, bourbon and Harley-Davidson motorcycles, with a total trade value of approximately $3.5 billion, according to The Economist.     

CBRE will continue to monitor and update our clients on the impact of the tariffs on the commercial real estate industry. Please reach out to any of the professionals listed below if you would like to discuss the subject further.