The Tariff Effect and the Potential Surge in CRE Asset Values
The sell-off in the stock market and swings in the bond markets over the last few months have raised some interesting questions for the commercial real estate industry. Where will the capital be redeployed? Will real estate be the ultimate beneficiary? We are now in an environment of unprecedented economic uncertainty. The most prominent factor in this uncertainty are the tariffs and how they will play out in the global economy. If history is any guide, I believe there will be a significant flight to quality into prime commercial real estate assets.
Market uncertainty, stoked by political meanderings over tariffs, is wreaking havoc across global financial markets. Forward projections are nearly impossible to provide. Many companies are refusing to provide any guidance at all. I do not envy public company CEOs and CFOs having to hop on earnings calls this quarter. This is a significant week with tech stalwarts Apple, Amazon, Meta, and Microsoft, along with non-tech behemoths Coca-Cola, Eli Lilly, and Chevron all reporting. Time to get out the popcorn.
I have been through four significant economic downturns in my career. What I have noticed observing investor behavior is that in times of uncertainty there is always a sell-off in the equity markets and then the flight to quality quickly occurs.
This is a phenomenon that happens in equity markets but does not happen in the commercial real estate world. Mark-to-market dynamics creates some very interesting and curious (and at times illogical) behavior. The most obvious example of this was the Great Financial Crisis (GFC) which rattled world markets in 2008. Everyone was panicking. Markets tanked. The global financial system was on the verge of collapse. Collateralized debt obligations and reinsurance positions held by the largest financial institutions in the world seemingly became worthless overnight.
As a broker specializing in trophy NNN retail assets, what I saw happening was, on the surface, counterintuitive. Real estate was the root “cause” of the GFC. How could it be possible that some commercial real estate assets ended up increasing in value while the rest of the investable asset marketplace was tanking? The answer is flight to quality.
Investors sought out tangible assets. Real estate is about as tangible an asset as you can find. Real estate is a physical thing. You own it outright (actually, you really don’t, the US government does, but that is a conversation for another time - if you don’t believe me, try not paying your property tax bill and find out who really owns your land). You have absolute control over the asset - something you do not have in equities. You can see it, stand on it, touch it. Equities are a bet. Some people are good at making these bets and the rest are suckers. Real estate is simple to understand. The newest AI enabled tech company - not as easy to understand for the average investor.
Real estate is considered to be an illiquid asset. Real estate takes a long time to sell and price discovery can be difficult. Conversely, liquidity in the equity and bond markets is simple - there is an instantaneous mark-to-market system in place. Liquidity is the core functionality of these markets. Single-tenant NNN retail properties are generally considered to be the most liquid real estate asset for a multitude of reasons. Credit tenant backed single-tenant assets are characterized by long-term leases with fairly homogenous lease terms which are easy to understand, require little-to-zero management, and trade like bonds - hence the term “bondable NNN lease.”
Here’s the bottom line: tariffs will drive up construction costs and cripple new development — while market volatility will push capital into tangible, income-generating assets. This two-pronged force sets the stage for a surge in demand and pricing power for property owners of existing prime assets.
Values for prime commercial real estate assets will increase. The flight to quality is merely one reason. The other reason is that tariffs will cause new development to slow to a crawl. Materials for construction such as steel, aluminum, lumber, electrical equipment, and imported construction equipment will increase in price. Rare earth materials used to manufacture some of these items are basically embargoed from US destinations. Lead times for delivery of specialized materials will also stretch out, causing development delays and thus increased carry cost risk. Developers will pause or cancel speculative projects due to increased budgets and compressed margins. Less development will create greater demand for existing assets.
Rising — and even more concerning, unpredictable — construction costs mean developers must charge higher rents to maintain returns. At some point, tenants will choke and be unable to pay rents that justify new development. Either tenants overpay and their businesses suffer from high occupancy costs or developers build to a lower return on costs. Neither outcome is likely.
The only place where developers can control costs and improve margins in this environment is in the price they pay for the land. That means land costs need to come down. Good luck with that.
So as more capital is chasing a finite amount of assets, the natural outcome is increased prices. Here we go again. This could shape up to be 2010 onward again. Wash, rinse, repeat.
Uncertainty → Fear → Sell-off → Flight to Quality and Certainty
The ultimate beneficiary = existing commercial real estate assets
This value premium should occur for properties across all asset classes, but as mentioned above, this should play out most significantly in the single-tenant NNN retail market in the best locations in core markets. Investors want assets with minimal or no management that they can sell quickly at the most premium price when it’s time to exit. Single-tenant NNN retail fits this bill better than any other real estate asset class.
Bond markets have also faced uncertainty with significant swings in the 10-year Treasury and underwhelming demand at recent Treasury auctions. If Treasury yields start to drop, this will compound the effect of pricing increases seen across prime commercial real estate assets. More capital chasing a fixed amount of quality assets combined with lower interest rates = the perfect storm for owners.
It is worth mentioning that the retail strip center market has been on fire and it’s clear that this trend will continue. There is an overwhelming belief that daily needs tenants are highly secure in this environment. Daily needs tenants in strip centers should be far less impacted by tariffs. As with single-tenant properties, the cost to buy existing assets is less than the cost to build them. This is true today and will be even more pronounced going forward. Purchasing existing assets doesn’t carry entitlement risk, the income stream is turned on day one, and rents can be raised slowly but consistently (annual increases in these leases are very common), providing the perfect combination of stability, certainty, and security during volatile macroeconomic conditions.
I also firmly believe that fast food properties are the absolute safest asset class for commercial real estate investment. Drive-thru properties are difficult to get approved and therefore have significant entitlement value, rents have risen consistently over the years, and more and more concepts continue to emerge which creates seemingly endless tenant demand. Fast food businesses are highly insulated from tariff risk. The burger patty, lettuce, tomatoes, etc. are all from the US. Sure, things like straws and lids may come from China but the input costs of those items are minimal compared to food and labor costs. Fast food tenants are also more secure in difficult economic times. People on tighter budgets look for less expensive options when dining out. What fills this market segment better than the fast food category? Nothing.
The only problem is that you can expect that owners of the best in class fast food assets will either be unwilling to sell or want a massive premium to do so. We are also finally seeing more pronounced differentiation in pricing based upon asset quality. In recent years, a Starbucks (for example) in Alabama would trade at the same CAP Rate as one in an in-fill Los Angeles location. It happened across the country with every tenant. That never made sense to me. Those days are over. Buyers expect discounts for non-prime assets and are willing to pay premiums for the best of the best. A Starbucks in Alabama is not the same thing as a Starbucks in Los Angeles. Not even close.
We’re entering a perfect storm for existing commercial real estate assets — especially in the single-tenant NNN retail space. On one side, tariffs are pushing material costs higher and making new development increasingly impractical. On the other, capital is flowing out of volatile equity and bond markets, seeking safety, predictability, and liquidity — all of which NNN assets uniquely offer.
When you combine these two forces — suppressed new supply and elevated investor demand — the result is a pricing environment that strongly favors well-located, stabilized assets. Particularly favored will be assets backed by essential-service, daily-needs tenants who are largely insulated from the ripple effects of tariffs.
In this environment, owning the right NNN leased real estate isn’t just a smart defensive play — it’s a strategic offense. The market has seen this before and it’s happening again.
Good luck out there.
