Answer extracted from The TreppWire Podcast: A Commercial Real Estate Show — listen to the full episode below.
How do Canadian tariffs on building materials affect development underwriting and project cost uncertainty?
The new 50% Canadian tariffs on cement, plywood, machinery, and tools stack on top of existing levies on steel and aluminum, creating significant cost pressures for builders. Construction material prices were already 7.4% higher year-over-year, with copper wire and cable up 18% and soft lumber up 15%—forcing contractors to add substantial contingencies to their bids and making financially marginal projects nearly impossible to underwrite.
Tariff layering compounds existing price pressures
The timing of Canada's new tariffs amplifies an already difficult cost environment. Copper wire and cable have jumped 18% while soft lumber is up 15% compared to the prior year, reflecting both tariff impacts and broader supply-chain constraints. When contractors face these rising baselines, a sudden 50% tariff on cement, plywood, machinery, and tools—applied on top of pre-existing tariffs on steel and aluminum—forces them to widen bid contingencies substantially.
As Stephen Buschbaum explains in the episode, these compounded pressures directly affect project feasibility. Developments that were already tight on margins become impossible to finance when contractors must add large contingencies just to protect themselves against further tariff swings.
Build-to-rent timelines expose underwriting risk
Build-to-rent communities present a particular vulnerability: projects are typically underwritten 18 to 36 months before completion, meaning developers lock financing based on cost estimates made years in advance. When tariffs change abruptly mid-construction, contractors cannot absorb the difference—they pass it to the owner through change orders or walk away from fixed-price contracts.
This creates a bifurcated market. Well-capitalized sectors like data centers—which show contractor backlog of 11.4 months versus 7.5 months for other work—can weather tariff swings because they offer stable returns and can absorb cost increases. Residential and mixed-use developments without that financial buffer face financing collapse or indefinite delay.
"The unrounded Core reading was 0.246, just four thousandths of a percentage point below the threshold that would have rounded up to 0.3%."
Stephen Buschbaum — Head of Applied Research and Analytics at TREP, a data modeling and analytics firm specializing in CMBS, commercial real estate, and CLO markets. Buschbaum conducts detailed analysis of macroeconomic indicators and their impact on commercial real estate cycles, including inflation trends, refinancing patterns, and capital sources in conduit CMBS transactions.
See also
How does rounding in inflation data affect market interpretation and Federal Reserve policy decisions?
Stephen Buschbaum explains that rounding had a meaningful effect on market reaction to the PCE report. The unrounded Core PCE reading was 0.246, just four thousandths of a percentage point below the 0.3% threshold, which would have caused Treasury yields to increase by double the actual amount.
Key takeaways
- New 50% tariffs on Canadian cement, plywood, machinery, and tools compound existing levies on steel and aluminum, forcing contractors to add substantial bid contingencies.
- Build-to-rent projects underwritten 18 to 36 months in advance face significant cost uncertainty when tariffs change mid-construction, making already-thin margins unsustainable.
- Well-capitalized sectors like data centers can absorb tariff-driven cost increases, while residential and mixed-use developments without that financial cushion face financing or project viability crises.
- Construction material prices were already 7.4% higher year-over-year, with copper wire and cable up 18% and soft lumber up 15%, before the new Canadian tariffs took effect.