April 2025 Multifamily Update

CHARLESTON, SC | April 22, 2025

Real estate markets are not directly driven by equity volatility, but the equity markets are a barometer of confidence, and clearly the markets are signaling a total lack of confidence at the moment. The markets are struggling to find the glimmer of guidance needed to make short-term directional positioning decisions, let alone the clarity needed by the real economy for industry and real estate managers to make long-term investment decisions.

Impact of Tariffs on Real Estate

While the cost of developing new housing is projected to continue to go up because of:

• tariffs on imported components of construction,
• reducing the labor supply through enhanced immigration enforcement,
• increasing the cost of capital (both equity and debt) that results from uncertainty, this last point is likely to be the most significant driver.

A few key considerations when examining the direct effect of tariffs:

• The effect on construction is still to be determined and will be regionally different (e.g. stick-built vs. concrete construction).
• Home builders are actively talking about (and lobbying over) the inflationary effect of tariffs on the raw materials for construction,
• However, we don’t yet know the cost of labor effect of more aggressive immigration enforcement tactics.

The National Association of Home Builders (“NAHB”) projects an increase of about 7.3% of all goods use in new residential construction originated from foreign nations in 2024. Here are some specific examples of tariff effects on real estate development:

1. Canada accounts for nearly 25% of all US imported soft lumber (for construction) and 85% of imported lumber. There is already a 14.5% tariff, but it is explicitly exempted from further tariffs at this time.
2. Mexican products that are major construction cost drivers such as gypsum (for drywall), concrete, and near-shored assembled appliances.

For context, NAHB estimates an average new single-family construction uses about $175k of building materials for construction, of which ~$12.7k are imported, so the total direct effect of tariffs on construction costs is likely 1-2% on overall construction costs. In addition, NAHB also estimates that building costs have gone up by 34% since December 2020, far outstripping CPI during that period. So the additional 1-2% in material costs due to tariffs are unlikely to be industry threatening. However, it is the uncertainty about what future trade policy will look like and how it will affect costs, in particular the cost of capital, that will have the bigger impact as sponsors and investors delay and may ultimately postpone new development decisions until they have greater clarity.

What Does it Mean for Ballast Rock’s Sunbelt Portfolio?

Slower development is positive for owners of existing housing stock, as lack of new supply is supportive for rental growth and likely drives asset values higher (rates depending). However, it will continue to contribute to the long-term housing crisis nationally, an issue that was a hot topic in the 2024 election cycle.

What are we seeing in work force housing specifically? We are seeing manufactured housing companies proactively add a 5-7% tariff surcharge. Remember, manufactured housing is often purchased with as little down as 5% when Agency financed, so think of that change of cost in the context of a buyers’ down-payment. Otherwise, we have had a relatively strong leasing season thus far and constrained additional supply will likely mean that it continues as long as we don’t hit a recession or significant labor market concerns.

The Impact of Rates

“Shelter” accounts for ~33-45% of CPI depending on your definitions/measurement. So, the big driver of front-end rates will be how does the Fed respond to changing inflation figures that may be impacted by tariff policy and overall shelter costs.

Further out the yield curve, why are US Treasuries not benefiting from the traditional “flight to quality” as equities sell off?

We posit both technical and fundamental concerns:

• Technical factors: UST/swap basis trade repositioning, concerns around China using treasury auction participation as a bargaining tool in the trade war, are examples
• Fundamental concerns: macro anxiety of threats to Fed’s independence (a Fed that had almost managed the impossible of a “Soft Landing” but are now staring down the barrel of self-induced “Stagflation”)
• Fed projecting 2x 25bps cuts where the market is projecting more like 87bps of cut by year end.

The Treasury and Fed have also been attempting to stabilize the markets:

1. Comments from Federal Reserve Governor Christopher Waller, who highlighted that recession risk would outweigh the risk of higher inflation.
2. The Supplementary Leverage Ratio rule, which treats USTs as a “risky asset” for bank capital ratios during times of stress, can be counterproductive but it sounds like Treasury Secretary Scott Bessent and the Trump Administration are looking to relax that rule, making it cheaper for banks to buy UST’s and ideally help cushion rate volatility.

However, our house view is that the guardrails are off the rates market at the moment. For example, the 10yr UST moved from a yield of 4.40% on March 27th to rally down to an intraday yield of 3.86% on April 4th, to then sell off back to an intraday yield of 4.59% on April 11th. This is an extremely volatile round trip in a few days, making long-term financing of any type, including real estate, hard to execute.

Conclusion

Real estate is an asset class where we need to make investment decisions with a medium to long-term horizon. As real estate fund managers, we view our role like piloting an aircraft carrier, we must see issues well in advance and position the portfolio for those risks years before they are likely to occur. Just as an aircraft carrier takes miles to turn, a real estate portfolio can take years to reposition.

The ultimate impact of today’s policies is difficult to quantify, and this uncertainty is really challenging for real estate more broadly, but particularly for new development. Any reduction in new construction is unfortunate for families looking to rent or buy homes as the cost for both will almost certainly increase in the coming years, however in the near-term it could be good for current owners of housing stock.

As such, while the current uncertainty makes it exceptionally challenging to manage and deploy capital in real estate, we expect to find opportunities to take advantage of this uncertainty in the months ahead.

About Ballast Rock Group

Ballast Rock Group is an integrated investment management company specializing in delivering risk-adjusted returns, accurate, and timely advice, high quality frequent reporting, and direct access to management. Ballast Rock Group operates Ballast Rock Asset Management, Ballast Rock Private Wealth, and Ballast Rock Capital. Ballast Rock Asset Management comprises Ballast Rock Real Estate, which includes the firm’s Sunbelt multifamily real estate funds, and Ballast Rock Ventures, comprising venture capital and private equity teams. Ballast Rock Private Wealth is a registered investment advisor, with a focus on alternative strategies. Ballast Rock Capital is a FINRA-registered broker-dealer. Ballast Rock is committed to being a driver of positive change. The diversity of our team members brings valuable new perspectives to our industry for the benefit of our stakeholders and the broader community.