S&P Global Ratings forecasts real GDP growth will cool to 1.9% in 2025 and 2026, down from 2.9% in 2023 and 2.8% in 2024, and average roughly 2.0% per year thereafter. The Trump administration's shifting policy mix is altering the economic outlook and the balance of risks to our growth forecast is tilted to the downside. We project inflation will remain closer to 3.0% in 2025 as tariffs increase prices along the domestic supply chain and for end consumers. As a result, we expect one 25-basis-point federal funds rate cut for 2025, ending the year at 4.00%-4.25%. Our key tariff assumptions include the 25% tariffs on steel and aluminum continue through our forecast horizon, as well as the current tariffs on Chinese imports--up 20 percentage points since the new administration--to an effective tariff rate of just above 30%. We also assume the U.S. applies a 10% effective tariff rate on imports from Mexico and Canada, which is ramped down in 2026 until it hits 0% after United States-Mexico-Canada Agreement (USMCA) re-ratification. Retaliatory tariffs already announced by Canada are ramped down in parallel. (Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies, March 25, 2025)

We expect the tariffs will have a greater impact on the building materials and homebuilding sectors because of their exposure to key construction products subject to tariffs such as lumber, steel, aluminum, and gypsum, as well as finished products such as cabinets and appliances. The National Association of Home Builders (NAHB) estimates that $184 billion worth of goods were used in the construction of new housing in 2023 and about $13 billon of those goods, or 7%, were imported from outside the U.S., with Canada and Mexico accounting for about 25% of these imports. This could result in meaningful increases to the cost of building a home, further weakening housing affordability. Higher costs will likely contribute to margin pressure for homebuilders and building materials companies as weaker consumer sentiment and elevated interest rates could limit their ability to pass through cost increases.

Building Materials

Building materials companies ended fiscal 2024 on a soft note, with earnings trending somewhat below our expectations. The recovery in demand lagged given higher interest rates and a cautious consumer. While we think we've reached a demand trough in late 2024, we don't expect a significant rebound in demand in 2025 given inflationary concerns, cost pressure, and an uncertain economic outlook.

Most building materials are sourced domestically, with only about 7% of all building products imported in 2023. Mexico and Canada accounted for about 25% of these imports, while China accounted for a significant amount. Still, looming tariffs could pose some downside risks to our forecasts as tariffs could further stress operating performance in 2025. Although not our base case assumptions, materially higher prices could dampen consumer demand and exert margin pressure should pass-through capabilities diminish and interest rates remain elevated, discouraging spending on more discretionary renovation and remodel projects. The lag to pass on costs could also be longer than expected. The exposure to tariffs will vary by company and is dependent on core product types. We expect those companies with more exposure to steel, aluminum, gypsum, lumber, and significant supply chain exposure to China to be harder hit. In many cases, we believe the exposure is manageable and they could absorb some cost increases through efficiency measures or inventory build ahead of tariff implementation.

Rating activity in early 2025 has been mostly positive. We raised the rating on Griffon Corp., Sabre Industries Inc., and Foley Products Co. LLC given successful reduction in debt leverage and expectations for performance to remain adequate despite likely softer demand and some cost pressure. We currently have 15% of ratings on negative outlook compared to 7% on positive, and 78% on stable. We expect the negative rating bias to grow, particularly at the lower end of the rating spectrum as input cost pressure erodes credit metric cushions relative to our downgrade triggers or adds liquidity pressure.

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Homebuilders

We saw an improvement in cycle times in fourth-quarter 2024 for most of the builders in our universe. This caused higher-than-expected spec inventory in some markets but overall, operating performance was as we expected with improving revenues and EBITDA for most of the builders we rate. Affordability challenges due to high mortgage rates will continue to dampen the sales pace in the important spring selling season. We expect tariffs to add meaningful cost increases (up to low-single-digit range) and further worsen housing affordability. We expect homebuilders and developers to pass along these cost increases to consumers when possible, but given expectations for weakening consumer sentiment and elevated mortgage rates, we think their ability to pass on cost increases may be limited. Combined with ongoing incentives, higher input costs will pressure margins in 2025, particularly amid softer demand. Immigration policy could also constraint labor availability and lead to higher labor costs, but the impact is uncertain and difficult to predict. We expect builders to continue to expand their community counts but manage speculative inventory depending on consumer demand. We expect lumber to have the most significant exposure to tariffs, as it accounts for about 15% of overall construction costs and imported lumber per builder varies across regions with most builders having no more than 30% exposure to Canadian lumber.

We recently revised the rating outlook on Beazer Homes USA Inc. (B+/Negative/--) due to elevated leverage and expectations that margin pressure will keep debt leverage higher than expected and upgraded The New Home Co. (B/Stable/--) due to improved operating performance and scale. We currently have about 10% of homebuilders on negative outlook versus 7% on positive outlook, while 83% are on stable outlook.

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CRE Services

We believe that the commercial real estate (CRE) servicing sector has passed the market bottom in this cycle. While seasonal factors will continue to affect leverage quarter-over-quarter, the recovery of transactional revenue, including capital markets and leasing, will likely contribute to lower leverage for the companies we rate.

We expect CRE services companies to continue to achieve steady growth in property and facility management businesses, supported by new client wins and mandate expansion from cross-selling opportunities. While these lines of businesses have lower margins relative to transactional businesses, they generate recurring revenue streams and provide earnings visibility due to longer contract terms.

CRE services companies will likely prioritize organic growth and remain opportunistic in shareholder-friendly initiatives such as share buybacks. Companies with excess capital could make further talent investments in transactional revenue businesses or M&A activities to broaden their existing service offerings in sectors with high growth, such as data centers.

Recently, we revised the rating outlook on Jones Lang LaSalle Inc. to stable from negative. While we expect a better operating environment over the next 12 months, we currently maintain negative outlooks on Cushman & Wakefield and Avison Young (Canada) Inc.

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CRE Fincos

In the fourth quarter, stabilizing conditions in the broader CRE market led to increased transactional activity and steady operating results for mortgage REITs. Still relatively high interest rates continue to pressure asset valuations by keeping cap rates higher, but the extent of the impact will depend on location, property type, and the underwriting quality on the properties securing their loans. Of the six CRE lenders we rate, loan loss provisions were 2%-6% of loans, and they realized losses through different remediation methods such as asset sales, partial paydowns, or foreclosures.

We don't expect systemic pressure on CRE portfolios to the extent we've seen over the last few years as evidenced by loans deemed risky (rating of '4' and '5') staying relatively unchanged in the fourth quarter of 2024. We think that the impact of high interest rates has been realized in CRE lenders' portfolios and that older vintage loans (originated prior to 2023) will cause further asset quality deterioration. We expect transaction volume will likely accelerate in 2025, allowing borrowers to exit certain investments. We expect CRE lenders will remain selective with new originations and will continue to preserve liquidity as they look to resolve troubled loans and expend capital on foreclosed properties.

Recently, we revised our outlook KKR Real Estate Finance Trust Inc. (KREF) to stable from negative with a 'B+' rating due to steady asset quality. We lowered our rating on Claros Mortgage Trust Inc. (CMTG) to 'CCC+' with a negative outlook from 'B-' with a negative outlook on rising liquidity pressure and refinancing risk.

In the fourth quarter of 2024, some lenders faced challenges on multifamily loans due to increased supply, slowing rent growth, and still-high interest rates. A rise in troubled multifamily loans could hit asset quality since most CRE lenders have increased their exposure to multifamily since 2020 to offset office exposure. The combined exposure to office and multifamily made up 50%-70% of the portfolio as of Dec. 31, 2024 (see chart 8).

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In 2024, CRE lenders scaled back originations, and that--combined with a precipitous decline in distributable earnings--caused most of the companies to cut or suspend dividends to preserve liquidity in a difficult CRE market. Throughout 2024, we saw lenders' loan books decline as repayments exceeded new originations and lenders used some of the excess liquidity to make voluntary repayments on these repurchase facilities and buyback shares.

Most of the lenders' common stock trades were at a significant discount to book value at year-end 2024, which limits their flexibility to raise capital through the equity markets. That said, some of the stronger companies in the space were able to issue unsecured and secured debt as well as equity in the second half of 2024.

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Equity REITs

REITs and real estate operators of stabilized assets are less exposed to tariffs, as their development exposure is generally limited (less than 10% of assets) and typically at substantial pre-leased levels, and contracts have terms in place to mitigate cost increases. Still, the negative impact of tariffs on consumer sentiment and unemployment could weaken tenant demand. Interest rate policy and market volatility could constrain access to capital and costs of financing. Debt issuance started slow for the year with rated REITs issuing $5.3 billion through February 2025, compared to $9.2 billion a year ago for the same period.

Operating performance continues to be generally positive for REITs. In the office sector, operating metrics are showing signs of stability with improving leasing activity and an uptick in transaction activity. Office REITs focused on the New York City metro area and Sunbelt markets have reported improving fundamentals while West Coast office REITs continue to face negative re-leasing spreads and occupancy pressure. Still, we expect the recovery for office to be slow given weak retention rates. Additionally, office REITs earnings guidance for 2025 has been somewhat below our expectations. On the other hand, operating performance for retail REITs remains solid with growing NOI and improving occupancy levels. Residential REITs are also showing resilient operating performance given worsening housing affordability. Renting remains cheaper in many markets where home prices continue to escalate amid high mortgage rates and rising construction costs.

We started 2025 with more positive rating actions than negative ones. We upgraded Regency Centers Corp. to 'A-' from 'BBB+', and revised the outlooks on Simon Property Group Inc. , Tanger Properties L.P., and Essential Properties L.P. to positive. We also placed the ratings on Sun Communities Inc. and Global Net Lease Inc. on CreditWatch with positive implications following their announcements to sell assets and our expectations for reduced debt leverage. On the other hand, we lowered Office Properties Income Trust (OPI) to 'CC' following the announcement for a debt exchange which we view as distressed. Our negative rating bias has moderated to 18% of ratings with negative outlook, 7% with a positive outlook or on CreditWatch with positive implications, and 75% stable.

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Related Research

• Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies, Mar 25, 2025
• Chilling Effects: Tariffs Hit Canadian Corporates, March 5, 2025
• Growth Prospects Strained After The U.S. Takes The Tariff Plunge, March 5, 2025
• What Looming Tariffs Could Mean For U.S. Corporates, Feb. 27, 2025
• U.S. Banks Are Better Positioned To Manage Commercial Real Estate Risks, Feb. 19, 2025
• Industry Credit Outlook 2025: Real Estate, Jan 14, 2025