Real estate faces a strategic dilemma: accelerate or delay capital expenditures amid permanent bonus depreciation and tariff uncertainties.
The real estate industry is currently positioned at a critical juncture, influenced by two significant federal policy elements.
On one hand, the One Big Beautiful Bill Act (OBBBA) made 100% federal bonus depreciation a permanent fixture, providing a robust, long-term incentive for capital investment.
Conversely, the market faces the increasing possibility of new or reinstated tariffs, which could significantly alter the cost landscape for capital expenditures.
This confluence of incentives and potential impediments creates a period of profound uncertainty regarding pricing and investment timing for real estate stakeholders.
The central hypothesis emerges: Does this uncertainty compel a "waiting game" on spending in anticipation of clarity on tariffs, or does the enduring benefit of bonus depreciation incentivize an acceleration of capital deployment in advance of the future tariffs?
The enduring incentive: Permanent 100% bonus depreciation
The permanence of 100% bonus depreciation, a key provision of the OBBBA, presents a powerful fiscal stimulus for the real estate industry, which will allow for the immediate expensing of the full cost of eligible qualified property, certain equipment, and other short-lived depreciable assets.
The elimination of the previous phase-out schedule removes a significant layer of planning complexity and provides long-term clarity for investment decisions. The immediate deduction capability reduces taxable income in the year of expenditure, thereby improving cash flow and enhancing the after-tax internal rate of return on capital projects.
This mechanism is designed to directly encourage the deployment of capital into physical assets and improvements.
The impending variable: Tariff uncertainty and its pricing impact
The specter of new or reinstated tariffs introduces a formidable variable into capital expenditure planning. Tariffs — particularly on imported construction materials and manufactured components such as steel, aluminum, certain lumber products, electrical fixtures, and mechanical systems — directly influence project economics.
The uncertainty itself, even prior to the introduction of tariffs, can induce price volatility in material markets. Suppliers may pre-emptively stock up on materials before prices increase, adjust pricing, or hesitate to offer long-term fixed-price contracts.
If tariffs are indeed imposed, they would almost certainly lead to higher direct costs for a broad range of construction inputs. This increased cost structure could erode project margins, potentially rendering previously feasible projects financially unviable or necessitating higher pro forma rents/sales prices to maintain profitability.
Beyond price, tariffs can disrupt established supply chains, leading to delays in material procurement and delivery. Such delays can extend project timelines, incur additional financing costs, and complicate project management, further impacting overall capital expenditure efficiency.
The strategic conundrum: Wait or accelerate?
The interplay of these forces presents a strategic dilemma for capital allocation:
Hypothesis 1: The "waiting game" (delaying capital expenditures)
- Await clarity — Postpone commitments until volatility subsides and the scope and magnitude of any new tariffs are definitively known.
- Mitigate cost overruns — Avoid locking in current pricing that might prove to be higher than future tariff-free (or lower-tariff) costs, or prevent exposure to significant cost escalations if tariffs are more severe than anticipated.
- Manage risk — Reduce exposure to supply chain uncertainties that could arise from tariff implementation.
Potential counterpoints to this hypothesis
Delaying expenditures means foregoing the immediate and permanent tax benefits of 100% bonus depreciation on qualifying assets that could be placed in service now.
Furthermore, if tariffs do materialize, waiting would result in projects being executed with higher material costs regardless, potentially with less lead time to adapt.
Hypothesis 2: Accelerating capital expenditures
Conversely, this hypothesis posits that the permanency of 100% bonus depreciation, coupled with the desire to front-run potential tariff-induced price hikes, could incentivize the acceleration of capital expenditures. The rationale would be to:
- "Beat the tariff" pricing — Secure necessary imported materials and components at pre-tariff prices where possible, or accelerate project starts to secure a larger portion of the expenditure occurs before new tariffs are implemented.
- Take advantage of immediate tax benefits — Capitalize on the immediate and guaranteed tax deferral offered by 100% bonus depreciation in the current tax year. This immediate benefit could help offset anticipated future cost increases or improve project economics.
- Gain market position — Accelerating development could allow entities to bring projects to market sooner, potentially securing advantageous leasing or sales positions.
Potential counterpoints to this hypothesis
Rushing expenditures without full clarity risks overpaying if tariffs are not implemented, are less severe than feared, or if alternative sourcing solutions become more viable.
It also introduces potential inventory holding costs and logistical complexities.
Strategic considerations for real estate stakeholders
The ideal strategy for real estate stakeholders during this period of uncertainty requires a highly granular and dynamic approach:
Detailed exposure analysis
Conduct an immediate and thorough review of current and planned projects to identify direct and indirect reliance on potentially tariffed inputs. Consider more than 20 ways to reduce risk related to tariffs with a Tariff Roadmap Assessment.
Strategic procurement and hedging
Explore options for strategic procurement, including fixed-price contracts for critical materials, pre-purchasing where feasible and storage is viable, and investigating alternative domestic or diverse international suppliers.
Scenario planning
Develop multiple financial models for projects based on different tariff outcomes (e.g., no tariffs, moderate tariffs, severe tariffs) to understand potential impacts on profitability and financing needs.
Leveraging depreciation
Prioritize capital expenditures on qualifying assets that are less sensitive to tariff impacts but can still benefit from the immediate 100% bonus depreciation.
Contractual protections
For new agreements, consider incorporating flexible clauses, such as material cost escalation provisions, to mitigate future price risks.
Ultimately, the decision to "wait" or "accelerate" on capital expenditures will hinge on a careful weighing of the certain, permanent tax advantages of bonus depreciation against the uncertain, yet potentially significant, cost increases from looming tariffs.
Proactive analysis, flexible planning, and diligent monitoring of trade policy developments will be paramount in navigating this complex fiscal crossroads.