Tariffs, taxes and deregulation make real estate waves

Like surfers waiting for the perfect wave, experienced real estate investors know that success — or a wipeout — often comes down to timing. In 2025, deregulation, surging interest rates and a volatile insurance market are likely to create swells of opportunity and potential rip tides.

Bold steps to cut red tape in housing development could speed up building timelines and accelerate returns — if financing is available just as quickly. Government property divestiture could reveal gems for private redevelopment. But new tariffs could affect the price and availability of vital construction materials.

For industry leaders bracing for opportunity and uncertainty, here’s a guide to riding the waves with confidence.

Housing deregulation could accelerate construction

President Trump’s January 20 executive order, Delivering Emergency Price Relief for American Families and Defeating the Cost-of-Living Crisis, includes directives to reduce housing costs by addressing regulatory barriers. The order calls for federal agencies to eliminate certain regulations, streamline permitting processes and revise building codes to facilitate more efficient and affordable development.

Historically, restrictive zoning has contributed to a reduced housing supply and increased costs by limiting the types of housing that can be built in certain areas. Permitting processes can average 18 months or longer for apartment buildings, adding delays and expenses to development projects, while outdated building codes impose unnecessary requirements that drive up construction costs. Streamlining these processes could reduce project costs and timelines.

While the precise time savings will vary based on local contexts, the executive order is expected to significantly accelerate construction timelines. To take full advantage of a deregulated environment, real estate investment firms and banks may need to reevaluate their capital deployment strategies. For example, developers may need funds quickly to capture opportunities with expedited timelines. To meet the demand, financial institutions could offer flexible loan products that accommodate quicker drawdown schedules and adaptable repayment terms. Investors should also prepare for a potential increase in project volume.

Tariffs could raise prices for construction materials

Trump announced plans to implement a 25% universal tariff on imported steel and aluminum effective March 12, 2025. While steel and aluminum tariffs are not new, imports from Canada, a major supplier of U.S. building materials, were previously exempt. The latest Section 232 tariff regulations eliminate those exceptions. A 25% tariff on lumber and forest products is also slated to take effect in April 2025.

U.S. builders typically maintain enough inventory of construction materials to last several weeks to a few months. Analysts anticipate that by the second quarter of 2025, many builders will need to procure additional materials, at which point the new tariffs will likely influence market prices.

In the past, the construction industry has carried the brunt of tariff-induced price hikes. If history repeats itself, that could mean higher costs for builders and a potential slowdown of construction activity.

The domestic supply chain for steel and lumber has some capacity to increase production; however, meeting the full demand will be challenging, especially on short notice. If the domestic industry cannot fully compensate for reduced imports, it could lead to supply constraints and increased prices.

Government property divestiture and urban development opportunities

In the executive order establishing the Department of Government Efficiency (DOGE), the President indicated his intent to cut the federal government’s real estate footprint in half, particularly in urban centers. While the administration has not disclosed specific cost-saving projections associated with real estate divestment, the administration is trying to cut $1 trillion in federal spending by July 2026, with real estate playing a major part in the savings plan.

The executive order does not offer any specifics or requirements related to property divestiture (e.g., minimum prices or potential buyers). Additionally, the directive emphasized prompt action without offering a deadline. Analysts believe initial listings could hit the market as soon as next quarter.

The push to reduce federal real estate holdings is happening alongside new return-to-office policies for federal workers — and could introduce logistical challenges. Agencies are divesting urban properties while trying to accommodate the returning workforce. To accomplish both goals, agencies may need to consolidate office spaces, reevaluate workspace allocations or modify existing structures to support increased on-site personnel.

Longer term, the sale of federal properties may unlock new investment opportunities for private sector redevelopment. Some of these federal properties may be located in designated opportunity zones — areas created under the Tax Cuts and Jobs Act (TCJA) to encourage investment in economically distressed communities. If the opportunity zone program is extended, investors could see additional tax benefits from redevelopment projects in these areas.

Federal agencies may also seek out facility options that offer more flexibility than traditional, owned office buildings. Renovations, space-sharing and leasing could become new ways for real estate developers to engage with the evolving federal workforce.

Status of TCJA tax cuts creates uncertainty

Several key provisions of the TCJA, including 100% bonus depreciation and Section 199A pass-through deductions, are set to expire unless renewed.

Bonus depreciation: The TCJA allowed businesses to immediately deduct 100% of the cost of eligible property, both new and used, that was placed into service after September 27, 2017. That began phasing out after December 31, 2022, with the deduction percentage decreasing by 20% each year until expiring in 2027. Without legislative action, the phaseout will continue.

Interest deductions under Section 163(j): The TCJA significantly amended this section of the tax law, imposing new limitations on the amount of business interest expense taxpayers could deduct. Prior to 2017, businesses could generally deduct all interest expenses associated with debt financing. After TCJA was passed, those deductions were significantly limited, which posed challenges for the real estate industry due to its heavy reliance on debt financing.

While companies could opt out of these restrictions by using an alternative depreciation system for real property, this generally results in longer recovery periods and disallows bonus depreciation on certain property. Businesses have had to weigh the benefit of full interest deductibility against the potential downside of extended depreciation schedules.

Efforts to modify or repeal the Section 163(j) limitations are ongoing, and this issue is expected to be a focal point in upcoming tax legislation debates.

Qualified business income deduction under Section 199A: Section 199A introduced a deduction of up to 20% for qualified business income from pass-through entities such as sole proprietorships, partnerships, S corporations and some trusts and estates. Ninety-five percent of all U.S. businesses — and a majority of real estate companies — are structured as pass-through entities because of the tax advantages and operational flexibility.

This deduction provided tax relief to pass-through businesses, aligning their tax benefits more closely with the reduced corporate tax rate. Congress is currently debating potential extensions beyond the sunset date of December 31, 2025, and legislation is expected later this year. But the current uncertainty calls for proactive tax planning, and businesses may want to consider switching their tax designations to C corps to optimize their tax positions.

For businesses looking to reinvest their profits, the ability of C corporations to retain their earnings within the company may offer a significant advantage over remaining as a pass-through entity, in which owners are taxed on all earnings, regardless of distribution. However, real estate investors typically avoid the C corporation structure due to the potential for double taxation and complications with appreciated assets. Unlike pass-throughs, which allow for the direct flow of gains and losses to individual owners, C corporations face additional tax burdens when assets appreciate and are eventually sold.

In addition, reverting to a pass-through entity after converting to a C corporation can be complex and result in additional tax liability. Businesses should consider the long-term implications of their structure and potential tax law changes before taking any action.

Higher interest rates and rising insurance premiums could slow deal flow

High interest rates and rising insurance premiums are increasing borrowing costs, squeezing margins and discouraging new transactions.

As borrowing becomes more expensive, the pool of qualified buyers shrinks. While this could drive prices downward in the long run, properties might remain on the market longer, and sellers may need to revise their expectations. Higher interest rates can also diminish the attractiveness of real estate investments compared to other asset classes, leading to a slowdown in deal-making and capital deployment within the sector.

Higher insurance premiums, driven by inflation and the increased frequency of natural disasters, are also contributing to higher operating expenses and squeezing profit margins. Just like higher borrowing costs, escalating insurance costs can alter the financial feasibility of real estate transactions. Unexpected premium hikes may lead to renegotiations or even cancellations of deals, as the projected returns may no longer meet investors’ criteria.Areas prone to natural disasters are experiencing more pronounced insurance premium increases, potentially causing investors to avoid high-risk areas.

Recommended actions for real estate developers

During these uncertain times, real estate developers and investors can take steps to protect their assets and seek out new opportunities. Now is the time for:

Strategic planning and risk assessments

• Monitor regulatory changes: Stay informed on evolving federal real estate standards and environmental review requirements.
• Diversify supply chains: Identify alternative sources for construction materials to mitigate cost increases. Consider project plans and specs that offer flexibility to procurement managers.
• Be an advocate: Participate in industry advocacy groups to influence policy outcomes.

Investment and tax planning

• Evaluate investment structures: Consider whether your current business structure is optimal for the new environment. Some owners may maintain pass-through status or convert to C corporations ahead of potential Section 199A expiration.
• Assess financing options: Explore potential benefits from tax law changes to Section 163(j) and 100% bonus depreciation.
• Leverage opportunity zones: If Congress extends the opportunity zone program, it could incentivize development projects in low-income areas. Prepare for potential zone extensions to maximize potential tax benefits for investing in designated areas.

Capital and deal structuring strategies

• Explore creative financing solutions: Consider alternative lending sources and partnership structures to mitigate high interest rates. Alternatives could include bridge loans (which offer quick access to capital and swift acquisitions), seller financing or entering equity partnerships with other firms to make large projects less risky.
• Review insurance strategies: Assess policy coverage and risk management approaches to counter rising premiums. Alternatives could include self-insurance pools, which offer more control over costs and terms, or enhancing resilience to natural disasters to lower premiums over time.
• Analyze market demand: Adjust development and acquisition plans in response to shifting economic conditions.

How Wipfli can help

“Location, location, location” is now “timing, timing, timing.” Our tailored advisory services help you stay informed and agile — so you can anticipate changes, jump on opportunities and avoid possible risks.

Responding to these policy shifts requires informed decision-making. Wipfli provides tailored consulting services to help real estate professionals stay informed, agile and proactive. For more information, visit our real estate industry page and contact us today.