As the economy continues to react to trade tensions, this blog explores how the current macroeconomic landscape is influencing the commercial real estate (CRE) industry.

Headlines about tariffs and market volatility have dominated the first half of 2025, leading to a surge in economic uncertainty. If used as a temporary tool to gain leverage in trade negotiations or to gain other geopolitical strategic advantages, recent tariff announcements may prove beneficial over the long term. However, ninety-five percent of economists agree that tariffs and import quotas negatively impact economic welfare.¹ Therefore, we are carefully watching economic data for signs of distress. Q1 GDP was negative, largely due to the subtraction of imports in the calculation, which spiked as consumers and businesses raced to bring in goods before the import duties started.²

The Role of Tariffs in Market Volatility

Tariffs are essentially government-mandated taxes on imported goods, many of which are implemented to protect domestic industries, influence international trade negotiations, or raise government revenue. Who ultimately pays the tariff is hotly debated. Ultimately it is likely that many parties across the supply chain will “eat” some of the additional cost, with foreign producers taking a hit, along with the importing business and potentially the consumer.

In our view, the key dynamic of the changes to trade policy is ultimately uncertainty. When making large investment decisions with long-term implications, businesses require clear sightlines into the future, in terms of their projected costs and prices they can charge. With the additional uncertainty brought about by tariffs, many businesses are adopting a cautious approach, pressing pause on decisions while assessing the long-term impact of the changes on operations and the global market.³

Financial markets often react negatively to these uncertainties, leading to increased volatility. Recent tariff announcements have fueled significant market turbulence. Following the April 2 “Liberation Day” tariff announcement, the S&P 500 responded with a sharp downturn, losing more than 12 percent, a decline not seen since the onset of the Covid-19 pandemic and prior to that, the Great Financial Crisis of 2008. April 2025 also saw the fifth-worst two-day S&P 500 percentage decline since World War II.⁴

After announcing a 90-day pause on the reciprocal tariffs for “non-retaliating” countries, the S&P 500 saw its best daily performance in nearly 17 years, with a 9.5 percent gain. At the same time, the sell-off in Treasury's stabilized. Currently, the broader market has executed a stunning comeback, returning to where it was when the “Liberation Day” tariffs were first announced.⁴

Market Volatility's Effect on CRE

Ongoing market turbulence may impact the cost of capital. After three rate cuts at the end of 2024, The Federal Reserve has repeatedly left its benchmark interest rate unchanged at a range of 4.25 percent to 4.5 percent.⁵ The long end of the yield curve, which is driven by growth and inflation and less beholden to the Fed, has also seen some volatility, with the 10-year Treasury rising rapidly since the end of April into the mid four percent range. This remains below the high-water mark set in October of 2023 at 4.99 percent.

Transaction volume in Q1 2025 is up 11 percent year-over-year but remains about 19 percent below the 10-Year Q1 average, reflecting some improvement despite uncertainty in markets and choppiness in interest rates. This year-over-year increase is an encouraging sign that capital continues to seek a home in real estate, further evidenced by cap rates remaining stable in the first quarter. With limited early info, thus far the CRE market has shown durability in the face of changing conditions, although many participants are taking a wait and see approach.

Transaction Volumes⁶

Not All Real Estate Sectors Are Equally Affected

Despite these headwinds, not all real estate sectors are equally exposed to economic pressures. Demographic-driven sectors—those with demand driven by demographic trends rather than macroeconomic activity— have demonstrated relative resilience during times of economic uncertainty.

Build-to-Rent: Homeownership remains out of reach for many Americans, with the cost to own a home requiring a significant financial obligation and maintenance responsibilities. These factors may lead to a growing segment of the population who will rent instead of own, whether by choice or necessity. Build-to-rent offers renters a unique opportunity to enjoy the best of both worlds: private space without the shared hallways, walls, sounds, and smells of apartment living combined with the amenities, affordability, flexibility, and lack of financial and time commitments associated with maintaining an owned home.

Self-Storage: Long considered recession-resistant, self-storage benefits from life events such as dislocation, downsizing, divorce, or death (the Four Ds)—all of which persist in any economy. The sector also enjoys relatively low operating costs and can adapt quickly to changing renter dynamics and demand.

Student Housing: Higher education remains a priority for many families, and universities continue to attract students both domestically and internationally. As enrollment continues to grow at top-tier universities, student housing near these campuses can maintain stable occupancy and rental income, relatively insulated from broader economic fluctuations.

Senior Housing: The aging U.S. population is driving long-term demand for senior living communities. With Baby Boomers entering retirement age in large numbers, we believe this sector is poised for continued growth, regardless of short-term economic turbulence.

Although tariffs and heightened market volatility are adding layers of uncertainty, the overall economy has shown signs of resilience with market gains in recent weeks. And, even amid concerns about a potential economic slowdown and looming recession risks, we believe there are several commercial real estate sectors well-positioned to weather various economic headwinds. By understanding the demand drivers behind each of these sectors, investors may be able to effectively navigate the constantly evolving economic environment.