The Replacement-Cost Advantage
Tariffs and a structural labor shortage have made new construction dramatically more expensive across the United States. That is bad news for anyone trying to build. It is quietly one of the best tailwinds standing real estate has had in a decade.
Two of TFIB’s recent Insights traced how the US–Canada trade war is reshaping capital flows and construction budgets. There is a third story sitting underneath both of them, and it is arguably the most investable one: tariffs are not just making new buildings more expensive to build. They are making existing buildings more valuable to own.
The mechanism is simple and, for investors holding income-producing real estate, increasingly favorable. When it costs meaningfully more to build a new competing property than it does to buy an existing one, new supply stops penciling out. Developers shelve projects. Lenders tighten. And every building already standing captures the pricing power that would otherwise have gone to a competitor that never gets built.
That gap has a name in underwriting circles: the replacement-cost advantage. In 2026, driven by tariffs and a labor market that cannot supply enough workers, it is the widest it has been in years — and it is showing up in real financing decisions, not just theory.
The New Math of Building
Construction costs have risen 39 percent since 2020, well above the 26 percent rise in general inflation over the same period, according to JLL’s 2026 Construction Perspective mid-year update, published in July. Final-cost indices are running roughly 5 percent higher year over year in mid-2026, with JLL expecting further acceleration in the second half of the year.
39% vs 26% — the rise in US construction costs since 2020, against general inflation over the same period
Tariffs are a direct driver. Steel, aluminum, and imported metal furniture now face duties of up to 50 percent following a Section 232 expansion in June. Cushman & Wakefield’s April analysis puts current tariff rates at a 6 percent increase to materials costs relative to a 2024 baseline, and a 3 percent increase to total project costs — with longer-term impacts ranging from 5 to 25 percent depending on the material, and steel-intensive scopes on mid-rise multifamily carrying an embedded tariff cost of roughly $15 to $25 per square foot.
The exposure is not evenly distributed. Structural steel and copper wiring hit data centers and industrial hardest; masonry and plumbing materials weigh most heavily on multifamily and mixed-use; lumber and wood products remain tied to the still-unresolved USMCA revision. Every asset class is affected, but not identically — which matters for where the replacement-cost gap opens widest.
The Labor Wall Behind the Materials Story
Materials get the headlines, but labor may be the more durable constraint. Construction employment growth is tracking at just 0.6 percent in 2026, against a historical average of 2.7 percent. Sixty-one percent of US metro markets are currently supply-constrained for construction labor, a figure JLL expects to reach 72 percent by 2027. The National Center for Construction Education and Research projects that roughly 41 percent of the current construction workforce will retire by 2031 — a timeline apprenticeship programs, which typically take five to seven years to produce a fully credentialed worker, are not built to absorb.
Data center construction is compounding the squeeze, consuming skilled trades and subcontractor capacity that conventional commercial and residential projects also need. JLL’s own framing is direct: interest rate cuts do not fix any of this. Rate relief improves debt service economics, but it does not touch tariff exposure or a labor market that is short workers for structural, demographic reasons. Even with meaningful Fed cuts over the next year, JLL’s analysis suggests construction costs will rise by more than the relief provides in debt service savings.
Where the Gap Is Actually Widening
The clearest illustration is a simple one. An industrial building acquired for roughly $85 per square foot in 2023, when replacement cost stood near $140 per square foot, now faces a replacement cost of about $155 per square foot in mid-2026 — and potentially $165 by year-end, per HB Capital’s analysis of the JLL and Cushman & Wakefield data. The gap between what an owner paid and what it would cost to rebuild has widened by roughly $25 per square foot in three years, and every dollar of that gap is downside protection the owner did not pay for.
New York City makes the same case at street level. Tariffs on steel, lumber, and Canadian softwood are adding an estimated 5 to 9.6 percent to new residential construction budgets citywide, pushing new-build costs to roughly $450 to $600 per square foot in a market where total housing inventory grew just 2.8 percent year over year even as sales volume rose 9.5 percent. Expensive-to-replace supply and resilient demand is close to the definition of a seller’s market for anyone already holding inventory.
The result shows up in the numbers developers themselves are producing — or, increasingly, not producing. Project abandonments surged 41 percent in late 2025, driven by tariff-related cost spikes, and ConstructConnect recorded a further 22.8 percent month-over-month jump in March 2026. Each shelved project is a unit of future competition that will not arrive on schedule, if it arrives at all.
Who Wins and Who Is Squeezed
BENEFITS | SQUEEZED |
Owners of existing, stabilized income assets — every dollar of cost escalation kills a competing project | Speculative developers without pre-leasing or a guaranteed maximum price contract |
Value-add buyers acquiring below replacement cost, as the discount widens with every material cost increase | Projects in data center–heavy markets competing for the same scarce trades |
Industrial and self-storage owners, where new competitive supply is rising in cost faster than existing NOI | Sponsors on open-book, cost-plus contracts with no ceiling on exposure |
Early procurers who locked materials and labor pricing before second-half 2026 acceleration | Multifamily developers exposed to masonry, plumbing and copper tariffs without contingency |
The pattern is consistent across the data: this is not a story about property type so much as about position. Assets already built and generating income are structurally favored over assets still trying to get built — in almost every sector at once.
What It Means for Investors
New supply is getting rationed by cost, not by demand. That is unusual. A typical downturn rations new supply through weak demand, which eventually self-corrects. A downturn rationed by tariff and labor cost can persist even while demand is healthy — which is closer to the environment JLL is describing for 2026 and into 2027.
Cap rates are showing early signs of responding. CoStar’s late-2025 forecast pointed to capitalization rates moving lower heading into 2026, with the clearest signals already visible in multifamily and industrial, where vacancies have peaked and rent growth is picking back up. Colliers, separately, forecast sales volume rising 15 to 20 percent in 2026 as institutional and cross-border capital re-enters — a sign that buyers are pricing the replacement-cost advantage into what they are willing to pay for standing assets.
Underwriting is starting to change on the lending side too. Sponsors financing acquisitions of existing assets are increasingly building a replacement-cost analysis into their lender presentations alongside traditional income-based underwriting, according to HB Capital’s mid-2026 commentary — and in markets where replacement cost exceeds acquisition price by 20 to 30 percent, lenders are treating that gap as real collateral coverage, not a talking point.
Not every standing asset benefits equally. The advantage is strongest where replacement cost is rising fastest and where a shelved competing project genuinely removes future supply — industrial, self-storage, and well-located multifamily in supply-constrained metros. It is weakest where demand itself is the binding constraint rather than construction cost, which is still true in pockets of office and some secondary retail.
The Questions That Will Decide How Long This Lasts
The replacement-cost advantage is real today. Whether it compounds or fades depends on a handful of things nobody can answer yet.
Does USMCA relief actually arrive? A meaningful revision to lumber and softwood tariffs would ease one of the largest cost lines for wood-frame multifamily specifically. Until it is signed, every developer is underwriting to the current, higher number.
Does the labor shortage get worse before it gets better? With 61 percent of metros already supply-constrained and that figure projected to reach 72 percent by 2027, the structural case for elevated costs may outlast the tariff cycle that is currently getting the credit for it.
How much of the abandonment wave is permanent? A shelved project can restart once costs stabilize. The 41 percent surge in late-2025 abandonments only becomes a durable floor under existing asset values if a meaningful share of those projects never come back.
Do rate cuts change the calculus more than JLL expects? JLL’s own view is that trade and labor costs will outpace rate relief in 2026. That is a forecast, not a certainty — and a faster or deeper cutting cycle than currently priced could narrow the gap sooner than the data above suggests.
We will keep tracking the answer here.
Sources & Further Reading
All figures cited above are drawn from the following publicly available sources, verified at the time of publication.
JLL — JLL Report Details Rising Construction Costs in 2026 — 2026 Construction Perspective: U.S. Mid-year Update, July 7, 2026 — https://www.jll.com/en-us/newsroom/jll-report-details-rising-construction-costs-in-2026
JLL — 2026 U.S. Construction Perspective (full report) — https://www.jll.com/en-us/insights/2026-us-construction-perspective
Cushman & Wakefield — The Impact of Tariffs on U.S. CRE Construction Costs, April 2026 — https://www.cushmanwakefield.com/en/united-states/insights/the-impact-of-tariffs-on-cre-construction-costs
HB Capital — CRE Construction Costs 2026: Tariffs, Labor and the Replacement Cost Advantage, August 2026 — https://www.hbcapitalre.com/cre-construction-costs-2026-tariffs-labor/
Tax Credit Advisor — 2026 U.S. Construction Cost Outlook, January 2026 — https://www.taxcreditadvisor.com/articles/2026-us-construction-cost-outlook/
Tax Credit Advisor — 2026 U.S. Construction Costs — Q2 Update, April 2026 — https://www.taxcreditadvisor.com/articles/2026-us-construction-cost-outlook-q2-update/
Construction Dive — ‘Unwelcome Surge’ of Project Abandonments Hits Construction, April 2025 — https://www.constructiondive.com/news/abandonments-project-stress-constructconnect/744831/
Just Construction Rec — When Projects Get Pulled: What a 22.8% Surge in Abandonments Means for Your Pipeline, June 2026 — https://www.just-constructionrec.com/when-projects-get-pulled-what-a-22-8-surge-in-abandonments-means-for-your-pipeline
Milton Coste / Keller Williams NYC — NYC Construction Cost 2026: $/Sq Ft for New Builds + Tariff Impact, April 2026 — https://miltoncoste.com/blog/nyc-construction-costs-tariff-impact-2026
CNBC — Here’s What to Expect for Commercial Real Estate in 2026, December 2025, reporting Colliers and CoStar forecasts — https://www.cnbc.com/2025/12/30/commercial-real-estate-2026-what-to-expect.html
The Motley Fool — Commercial Real Estate Investing Statistics 2026, June 2026, reporting RCA Commercial Property Price Index data — https://www.fool.com/research/commercial-real-estate-investing-statistics/
Published by The Frontier Investment Brick, a division of Experiential Group Inc. This article reflects general research and publicly available information at the time of writing. It is provided for informational and educational purposes only and should not be relied upon as investment, legal, or tax advice. Market data, cost estimates and forecasts are subject to change and may vary by market and asset type. Readers should consult qualified investment, legal and tax professionals before making investment decisions.
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