Suppose interest rates are cut in the near future. Will that decision financially balance out the new cost of tariffs in build-to-suit and tenant-improvement commercial real estate opportunities?
No, tariffs and interest rate cuts are unlikely to “fully balance out” for most ground-up or build-to-suit construction projects. Tariffs increase upfront construction costs (materials, equipment, certain fixtures), while rate cuts—if/when delivered—reduce the ongoing cost of capital more gradually and unevenly. Over the next year, building projects that require a lot of steel and equipment are likely to become more expensive, even if borrowing money becomes slightly cheaper.
Why won’t tariffs and interest rate cuts cleanly offset?
- Tariffs induce immediate hard costs. New and elevated U.S. tariffs on Chinese-origin goods (notably steel/aluminum, semiconductors, EV/battery components, solar inputs) raise input prices and procurement risk.
- Rate cuts are prospective and don’t always impact your actual borrowing benchmark. The Fed has signaled cuts could come soon, but when and how significantly is uncertain. Even when the policy rate moves, the 10-year Treasury and credit spreads (the real drivers of construction and permanent loans) don’t always follow 1:1.
- Cap rates and financing bases don’t mechanically fall with Fed cuts. Sometimes other factors, like the economy or lenders’ rules, keep them from going down as much as people expect.
What this means for business leaders making a build-to-suit decision within 12 months?
- Plan for a bigger “cushion” on unpredictable hard costs (especially steel, electrical gear, HVAC, specialized equipment). Lock pricing early where possible; use indexed escalation clauses for what you can’t lock. Your suppliers and project managers can help you navigate this and should be clear about timelines regarding the expiration of quotes.
- Plan for a bigger delivery window for equipment and supplies. Lead times for items such as lighting, furniture, HVAC units, and IT infrastructure can be unpredictable due to supply chain delays, so incorporating extra time helps prevent downstream construction and installation setbacks.
- Negotiate Common area maintenance (CAM) caps into your lease agreement. Setting caps on your CAM limits any unpredictable operating cost increases and creates budget certainty throughout the lease term.
- Negotiate shared escalation mechanics in your lease: In a build-to-suit, work with the landlord to split rising material costs fairly and set clear, transparent allowances so both sides know exactly what’s covered.
If you are looking for support negotiating the economic changes within your commercial real estate strategy, call Keyser 602.9.KEYSER or email us at info@keyser.com.
