The Equation of Unpredictability: Tariffs, Interest Rates, Rising Material Costs

For the building and construction industry, the current economic climate presents a variety of challenges, making it hard to predict what the year – or the next few years – might look like as they unfold.

A variety of factors contribute to this paradigm – fluctuating interest rates, proposed tariffs that have the potential to impact global trading, and ongoing unpredictability in the global supply chain.

The American Institute of Architects publishes a monthly AIA/Deltek Architectural Billings Index (ABI), which tracks whether architectural billings increased, decreased, or stayed the same. Over the past two years, this index has consistently tracked billings as just below the previous month.

Inflation pressures leading to higher building materials cost and higher interest rates have dampened investment opportunity for both the commercial and residential building sector. While inflation rates continue to slowly decline, uncertainty around the impact of tariffs on building materials pricing have exerted new pressure on architects as they strive to win new projects and grow their firm’s business.

What are the complexities for architects in this climate? How does it impact how they specify products for any particular job? And how does that all cascade to the rest of the industry?

Sifting Through the Variables

When an architect plans a project, their intent is to reduce risk and anticipate costs. They plan under strict budgets. Foundational building materials such as steel, lumber, and aluminum make up a sizable volume of imports into the Unites States and must be factored into the advance planning and cost estimating for any project. Expected tariffs on these products will directly raise construction costs.

Unexpected and unknown price spikes lead to design compromises, including identifying and substituting for products not affected by tariffs, which can impact design integrity or lead to delays. Plus, there is no guarantee that substitute products can be found or are readily available as demand for domestic supply increases.

Higher interest rates make it more expensive for developers and individuals to borrow money for new projects. This dampens demand in commercial and residential segments. When financing slows, architects see their project pipelines dry up. There are less RFP opportunities, and current projects often experience delays in design stages while the developers and building owners wait for financing conditions to improve.

Beyond rising prices, a bigger potential problem with the tariff environment is price volatility. Tariff policy is in flux and will be different for each country negotiating deals with the United States. These cost fluctuations make it difficult to bid and set accurate construction budgets with any reliable confidence. This can lead to an architect having to inflate an estimate to anticipate both pricing changes and design revisions. Such an adjustment impacts timing and profit margin. This volatility may also cause architects and building owners alike to stay away from higher-performance materials that are more durable, resilient, and sustainable as cost pressures make it unaffordable.

An Architect’s Specification Process: Dealing with Uncertainty

The byproduct of economic stress? Innovation and the discovery of creative design solutions. Such factors also dictate the need to find more energy-efficient and low-maintenance methods and designs to save long-term costs.

Availability-Based Product Specification

Architects may shift designs to find better surety by specifying products domestically, ones that are readily available and have shorter lead times. This may mean sacrificing quality, performance, or aesthetic options, and the domestic market may quickly find itself lacking inventory.

Product Substitution

Often the path of least resistance comes into play. Architects will change the specification from one material to another (from a Canadian hardwood floor to a luxury vinyl tile) to avoid a tariff situation and gain more pricing reliability. This may require the architect to spend extra time ensuring the substitute product meets both performance and regulatory requirements.

Budget-Driven Value Engineering

Architects may shift their behavior toward proactively specifying less expensive materials, products, and product options out of the gate with new project RFPs. There may also be a greater emphasize on modular design and pre-fabricated solutions to reduce the risk.

Shift toward Renovation

For the shorter term, architects may find the demand for large, new construction projects to be blunted with more firms competing to win less projects. And the increased risk on budgeting larger projects might make restoration work more attractive.

Types of Projects Most Affected

Tariffs along with an expected continuation of higher interest rates and materials costs will affect the building industry overall. Here is a specific look at a few segments.

Institutional Construction – Schools, Healthcare, Governmental Buildings

This segment of commercial construction may be hit the hardest due to the long lead times for project planning and the fixed/limited budgets, which make them less adaptable to sudden pricing changes.

Industrial/Warehousing

These projects use steel frames and metal panels in many cases. Steel and aluminum are expected to be in the tariff bullseye. At the same time, continued growth is expected in this sector, and architects will need to adapt via pre-engineered solutions, alternative materials, and simplified specifications.

Multi-Family

This is already a cost-sensitive segment with higher financing and materials costs. Developers are looking for savings at every step. Substitution is common, but overall pricing will still be a factor. Modular and pre-fabrication are viable solutions, as are domestic-produced materials like luxury vinyl tile.

Large Office, Mixed Use, Retail Development

Reliant on steel construction, curtain walls, metal panels, large HVAC systems, elevators, and lighting systems, this segment is exposed to tariff risk. These building components – or the materials and parts used to develop them – are heavily imported. Additionally, higher borrowing rates put additional pressure on investors to assume risk and produce an acceptable ROI. Value engineering and substitution are the focus for architects specifying projects in this segment.

A Closer Look: Construction Materials Most Affected

The federal government’s tariff policy continues to evolve, especially as negotiations with various countries are in progress. Therefore, the overall impact of tariffs is an ongoing variable. It is expected that some materials will adjust down from current expectations, and there will likely be exemptions as the policy rolls out. Beyond tariff uncertainty, global lead times and shipping costs also put pressure on materials pricing. Here are a few material categories that may be affected.

Lumber and Engineered Wood

Prices have been volatile since the pandemic, and lumber prices remain high. Tariffs would significantly impact the residential housing market. Architects would look for composite and laminated solutions where they can.

Steel and Aluminum

High tariffs on global suppliers will force a shift to domestic resources. Architects could specify alternative cladding solutions, moving away from metal skins and toward fiber cement, EIFIS, and brick.

Custom Millwork

Architects may consider more modular casework and prefabricated cabinetry solutions, which require less labor and materials and result in a more competitive bid. However, millwork should not feel the impact of tariffs.

Stone and Tile

There is a heavy reliance on imported options for this category, which could significantly affect an architect’s specification mindset. Substitution for domestic sources or alternative materials would be expected.

HVAC, Elevators, and Lighting Systems

Multiple-part systems have a reliance on globally sourced parts. Architects would look for domestic specification solutions or simpler mechanical designs.

The Charge for Architects: Adapt

For construction professionals of all stripes – including architects – clarity on the global economy will likely remain unattainable. At the same time, architects and construction professionals of all kinds should be able to take cues from the current state of affairs.

Interest rates are not expected to decrease significantly to pre-pandemic levels, which is when the market provided abnormally low borrowing terms for both for homeowners and commercial investors. While inflation is normalizing, supply chain and tariff volatility will likely keep building materials pricing elevated.

To compete in this economic and regulatory environment, architects will need to be resourceful in how they plan projects and source the materials that make up the built environment they envision. This means they will need to identify innovative solutions for the overall approach such as modular construction, where components of the building are constructed in a factory or controlled environment and then transported to the project where they are installed. Architects may also need to shift specification preferences to materials that are less susceptible to tariffs so that they can achieve greater cost certainty. In addition, they will need to emphasize practical value-engineering processes that might motivate clients to move forward.

Ultimately, it requires a strategic combination of creativity, flexibility, and compromise for architects to get any project off the page and closer to a ground breaking.