💸 How Trump's tariffs could impact CRE

🦃 Happy Thanksgiving, Best Ever readers! Americans will consume roughly 46 million turkeys today. We hope yours is the Best Ever.

In this week’s newsletter, Trump promises tariffs, John Chang launches a podcast, and new multifamily supply is coming to a market near you.

Side Note: Are you stuck in your commercial real estate business? Matt Faircloth is offering three lucky investors a FREE, live coaching session in the Best Ever Community. Tell Matt where you're stuck, and in 10 minutes or less, he will use his experience and expertise to provide actionable insights to help get you UNstuck.

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Turkey Time!

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CRE HEADLINES

🚨 Criminal Charges: Nightingale Properties CEO Elie Schwartz is expected to face federal criminal charges next week for his role in allegedly embezzling $54 million from crowdfunding investors. 

📈 Rising Renewals: U.S. apartment lease renewals reached 54% in October 2024, up 120 basis points YOY, as operators prioritize retention amid high supply levels. In six of the top 50 markets, renewals were up over 300 bps, while San Diego and Austin saw declines.

⭐ Unlikely Leaders: Amid market volatility and luxury oversupply, one- and two-star properties have emerged as unexpected rent growth leaders since the pandemic, consistently outperforming higher-priced options over the past two years.

🏢 Conversion Surge: Office-to-residential conversions are gaining momentum as plunging office values make projects more financially viable. While only 73 conversions were completed in 2024 (up from 63 in 2023), 309 projects are now planned or underway, potentially creating 38,000 new residential units.

🎙 Introducing ‘The Horizon’: John Chang, national director of research services at Marcus & Millichap and perennial Best Ever Conference speaker — launched his new podcast this week, The Horizon, on the Best Ever CRE Show. Listen on Apple, Spotify, or wherever you get your podcasts.

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HOW TRUMP’S TARIFFS COULD IMPACT CRE

President-elect Donald Trump has pledged to impose a 25% tariff on all imports from Canada and Mexico until they address drug trafficking and border crossings, and a cumulative 60% tariff on Chinese imports. The potential to trigger trade wars aside, if we niche down, the prospect of such tariffs threatens to have an impact on commercial real estate.

In a recent economic summit for the Best Ever Conference, John Chang, Neal Bawa, and Hunter Thompson discussed the proposed tariffs and how they could impact CRE.

• Lumber Costs: Lumber is typically the single biggest component of building costs, and the U.S. imports the bulk of its lumber from Canada. However, according to Bawa, it will be difficult for Trump to (legally) impose tariffs on Canada and Mexico, largely due to the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2020. However, with the U.S. South poised to surpass Canada in lumber production for the first time since 1970, Bawa doesn’t foresee any meaningful changes in lumber costs.
  

• But We’ve Been Here Before: Previous tariffs on Canadian lumber — which included a 20% tariff in 2017 plus additional anti-dumping duties in 2020 — provide a blueprint for what to expect. Those tariffs contributed to lumber prices tripling before settling at about 1.4X pre-pandemic levels, suggesting markets eventually adjust but establish new pricing floors.
  

• Other Materials: Beyond lumber, other materials such as windows, doors, miscellaneous hardware, and a lot of steel come from China, which has some investors concerned about the proposed 60% tariff. But Bawa cautions that there’s no need to fear an immediate impact. “Trump has given us a promise of 60% tariffs,” he said. “But he didn't say when he would put 60% tariffs in. What we've seen in the past is that any administration that is tariff-heavy usually phases them in.”

A Step-Up Impact: As Bawa alluded to, the proposed 60% tariff on Chinese imports likely won't hit all at once. The typical pace, Bawa says, is roughly 10% every six months. This phased approach allows U.S. manufacturers and suppliers time to adjust, while also giving developers and investors time to secure materials and plan accordingly. 

Some Are Planning for the Worst: After talking to suppliers, Chang noticed a trend. “They're bulking up their inventories,” he said. “They've ordered just about everything they can get. They're filling every warehouse they have in order to get as much as they can into the states before tariffs come into place.”

WHAT IT ALL MEANS

The proposed tariffs create contrasting impacts for different investment strategies. Developers could face direct 5-8% construction cost increases, according to Bawa, and may see some projects become unrealistic (though some top-tier developers will benefit from less competition). The value-add investor is impacted less and could benefit from the widening gap between acquisition prices and replacement costs while facing less new supply competition as development costs rise.

Still, whether you’re a developer or a value-add investor, because tariffs will likely be phased in over time, the real inflationary impacts likely won't materialize until 2026-2027 when tariffs could reach 30-40% or more — if the President-elect delivers on his promises.

👉 For more on this and other topics, you can watch the full economic summit here.

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2025 APARTMENT SUPPLY LEADERS

More than 500,000 new apartment units are expected to be delivered across the U.S. in 2025, with 14 markets receiving more than 10,000 units each. 

• Among major metropolitan areas, New York leads with 35,000 units (1.8% growth), followed by Phoenix with 29,600 units (7% growth) and Los Angeles with 19,400 units (1.6% growth), peaking in Q3. 

• The Texas Triangle shows substantial growth, with Dallas, Austin, and Houston each receiving between 14,000 and 27,000 units. Other Sun Belt markets including Charlotte, Raleigh, Atlanta, and Orlando will be supply leaders, alongside Western markets like Seattle and Denver.

• Several smaller markets are showing notably high growth rates, led by Asheville, NC, with the highest rate nationally at 13.3% (3,500+ units). Other high-growth markets with rates exceeding 7% include Huntsville, AL; Wilmington, NC; Cape Coral-Fort Myers, FL; Savannah, GA; and Myrtle Beach, SC. 

While supply delays might reduce these numbers somewhat, 2025 is positioned to be a year of substantial apartment inventory growth across most major U.S. markets.

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15% EQUITY ON DAY ONE AND FULLY STABILIZED IN 4 MONTHS

Leo Young and the team at Cornell Communities secured 15% equity on day one with this manufactured home community that is already stabilized and cash-flowing after just four months. Here's how they’re doing it 👇

🏢 Property Details: This 32-unit manufactured home community located in Vineland, NJ, was purchased in July 2024.

💸 Finances: The property was purchased for $1,650,000. The team raised $750,000 in capital and secured a $1,237,500 (75 LTV) loan at a 7% fixed interest rate.

💼 Business Plan: Leo and the team negotiated a strong basis for this property by working directly with the seller and building a relationship with his family over the past year. Previous properties of a similar size in the area had traded for $65K/lot, representing a 15% discount for this sale at $55K/lot.

The team plans to implement gradual rent increases of about 3-5% per year (currently over $100 below market rent) and bill back utility costs to tenants (which will help conservation as well). Over $100,000 is budgeted for the development of two units as well as landscaping, fencing, and security improvements, with additional reserves set aside for ongoing maintenance to enhance safety and appearance. Additionally, selling the single park-owned home to its tenant will create a fully tenant-owned park, reducing operational risk and fostering a stable community.

💪 Biggest Challenge: The biggest challenge was the language barrier, since virtually all residents spoke Spanish. Many tenants were also not tech-savvy, so getting them onboarded to the online portal was difficult. Leo hired a Spanish-speaking member to the team to help with communications and spend extra time onboarding residents.

🍾 Projected Results: The team is planning a five-to-10-year hold on this property. Valuation is projected to be $2.9 million in 2029 and $3.7 million in 2034. Projected investor returns are:

• Avg. Annual Return: 20%+

• Average cash-on-cash: 9%+

• Equity multiple: 2.0x+

• IRR: 16%+

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