New tariffs on materials are raising building costs and threatening some development for an industrial sector already facing record-low levels of construction.
For Dedeaux Properties, a Southern California industrial developer, that's playing out in the form of projects becoming even more challenging to make financially feasible, with rising costs forcing the firm to rethink whether it should move ahead with new development.
A 25% tariff on steel and aluminum — materials used in industrial properties — took effect March 12. Increased tariffs on lumber and concrete could also hurt industrial construction, as well as rising import costs for electrical components and other infrastructure materials from China. Port traffic is expected to slow along with imports, tightening supply.
"We’ve already gotten letters from suppliers saying that there’s going to be a 20% increase on steel,” said Benjamin Horning, director of development at Dedeaux Properties. The firm has plans for more than 2 million square feet of industrial properties under development, including distribution, transloading, truck terminals and trailer yards across Central Los Angeles and in California's Inland Empire.
“This past year, we were seeing costs decrease up to 20% in some instances, and we were thinking maybe now’s the time to break ground on a few of these deals," Horning said. "But now these tariffs are coming into play.”
Such tariffs may "lead to a pretty significant negative shock to the U.S. economy,” Oliver Salmon, a global research director at Savills in London, told CoStar News in an email. “This clearly makes it much harder to underwrite new deals in the U.S. right now."
The levies have some positives by pushing for an increase in manufacturing capacity in the United States, economists say, over the longer term.
Development in doubt
But the Trump administration's latest announcement of trade tariffs affects goods imported from about 100 countries, according to Joseph Cahoon, director of the Folsom Institute for Real Estate at Southern Methodist University in Dallas. That means new development could take a real hit.
"Projects are challenging to get off the ground today with where interest rates are and contractors trying to be price competitive," Cahoon added. "These price increases will have to work their way through the system, but how long it will take to work through this is unknown."
U.S. industrial construction starts peaked in mid-2022, but since then, slowing demand and high interest rates have caused groundbreakings to continually decline, according to CoStar research. Starts fell to 10-year lows in late 2024 and have continued falling so far this year, with supply growth expected to hit 11-year lows in 2026.
Dedeaux was starting to get its arms around the current construction cost climate before the tariffs took hold, Horning said. The sudden turn in pricing momentum is a jolt back to square one after it looked like the math was starting to work again for new development.
The latest jump in materials costs could be enough to make some projects now pencil out in the red.
“Construction starts are already down to a decade’s-plus low, and they could remain scant for a longer time now,” said Jesse Gundersheim, CoStar's senior director of market analytics for Los Angeles. “Building just got a whole lot more expensive as we source a lot of raw materials like concrete from outside the country.”
Climbing costs
Tariffs, in addition to posing risks to development strategies, can threaten already shaky industrial tenant demand, as higher costs threaten global supply chains. Warehouse owners are already seeing tenants delay new leases as a result of enacted and proposed tariffs as firms sought a clearer picture on how potential price hikes from retailers will affect consumer demand.
“There’s a precedent for trade falling due to tariffs,” Gundersheim said. “The last time tariffs were this high — jumping all the way to 20% essentially — was following the Smoot-Hawley Tariff Act of 1930. And imports and exports absolutely cratered.”
There’s a more recent precedent, too. Imports to Southern California dropped in 2019 after the Trump administration imposed tariffs on Chinese goods. But those increases were “tame in comparison to [last week's] announcements,” Gundersheim said.
This time around, the economic stakes may be even higher. The Port of Los Angeles predicts a 10% decline in cargo volumes later this year due to the new duties. And the Tax Foundation estimates imports will fall 28% nationwide in 2025.
That could unwind recent gains in logistics leasing. Vacancy in Southern California logistics buildings over 100,000 square feet declined in the first quarter of 2025 following a three-year increase, while vacancy fell 20 basis points to 7.1%, according to CoStar data.
Tenants already wary of economic uncertainty may scale back expansion plans further, Horning said.
“We’ve had such a lag the past few years, and now it finally seemed like we’re seeing activity on a lot of our properties that have been sitting vacant for a while,” Horning said.
Rather than wait for clarity, Dedeaux Properties is taking defensive steps to protect its projects. That means adjusting contracts now to lock in pricing and avoid surprises later.
“We’re trying to modify all of our agreements, make sure it’s kind of iron clad so that once this agreement is in place, you’re locked in, that’s it,” Horning said.
Harder to build
In announcing the tariffs, the Trump administration said one of the goals was to boost domestic manufacturing capacity, particularly in certain industrial sectors such as automobiles, shipbuilding, pharmaceuticals, technology products, machine tools and basic and fabricated metals.
Should that happen, it would be a boost for U.S. real estate in the longer term.
"If President Trump holds to his tariffs and it's not just a bargaining tool, the reshoring of trillions of dollars of manufacturing will benefit all aspects of commercial real estate," said Evan Stone, managing partner of Dallas-based Goodwin Advisors, a boutique capital markets firm.
Stone added that "you are going to have billions of dollars of new construction. You're going to have factories pop up in new areas of towns and newly rediscovered cities, reigniting building booms in those areas."
Still, some experts caution that a near-term surge in manufacturing demand may not fully replace current levels of industrial activity driven by e-commerce and logistics.
“American-based manufacturing will gain competitiveness, but it’s hard to imagine the demand for manufacturing space it sparks will more than offset logistics space used by distributors, at least in the near term,” Gundersheim said.