Chandan Economics reposted this
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As costs rise and new tariffs target key trade partners, how much higher will rents climb before affordability breaks? Can new residential construction still pencil out as tariff costs hit every American? TLDR: This week’s economic data contrasts with policy discussions on tariffs. The latest Bureau of Labor Statistics' Producer Price Index (#PPI) showed final demand goods rising 0.3% in February, a slowdown from January, while the Consumer Price Index (#CPI) indicated annual inflation easing for the first time in five months. Unfortunately, these backward-looking reports don’t the reflect inflationary pressures new tariffs will introduce. New tariffs on key trading partners will drive up residential #construction #costs, squeezing affordability. The National Association of Home Builders warns tariffs on Canadian softwood lumber alone could add $7,500 to $10,000 to a new home’s cost. The The Wall Street Journal reported this week that while investors expect builders to absorb these costs, given market conditions, they will inevitably be passed on to buyers and renters. The impact extends beyond for-sale single-family homes. Higher construction costs mean higher rents for MFR and build-to-rent (#BTR) developments, straining affordability nationwide. Arbor Realty Trust and Chandan Economics reported in early 2024 that multifamily permitting had already slowed due to oversupply concerns. I expect this trend to continue in 2025 as costs climb. While BTR and single-family rentals (#SFR) may absorb some demand, these units already command higher rents. With escalating costs, breakeven rents must be higher than originally underwritten, intensifying lease-up risks and affordability challenges. A potential recession adds a dual threat: limiting achievable rent increases while deepening financial hardship for renters. Labor shortages adds even more complexity. As Aziz Sunderji highlights, undocumented workers are crucial to construction, especially in Texas and California. Potential deportation actions could worsen labor shortages, driving up costs and causing significant project delays. The National Association of Home Builders estimates that labor accounts for 25% of a home's price. Meanwhile, with framing lumber prices surging and Canadian lumber tariffs possibly exceeding 50%, the impact could resemble COVID-era supply chain disruptions. Chandan Economics recently underscored that, despite economic uncertainty, the SFR sector remains a key driver of rent growth and maintains strong occupancy amid high mortgage rates. However, the sector is shifting. While a plateauing of BTR/SFR development was expected, 2025 was initially projected as a year of stabilization rather than decline. Yet, with occupancy falling and an influx of completions, the sector’s trajectory remains uncertain. Whether it stabilizes or faces deeper challenges depends on how developers and investors navigate rising costs, shifting renter demand, and broader economic conditions.