by Elijah Moore, on Mar 14, 2025 7:00:00 AM
In 2025, the renewed U.S. tariffs are expected to reverberate through industries that rely heavily on steel, especially construction and manufacturing. As these tariffs — up to 25% on steel and aluminum from various supplying countries — will likely lead to rising steel prices, it will become increasingly important for companies looking to expand their footprint to understand the potential impacts on construction costs. Planning for the future will require a strategic approach to mitigate these price increases and ensure cost-effective projects.
The steel tariffs and their potential impact on U.S. construction
The U.S. relies heavily on imported steel to meet its domestic demand, as evidenced by the significant gap between production volume and apparent consumption. From 2015 to 2023, apparent consumption consistently exceeded production, with import penetration peaking at 33.69% in 2015 and remaining above 23% throughout the period. Even in years where production volume increased, such as in 2018 and 2021, import volumes remained substantial, indicating a persistent dependence on international sources to fill the gap between domestic supply and demand. This reliance underscores the importance of global trade in maintaining the U.S. steel supply chain.
Domestic steel prices are likely to rise due to reduced competition, as higher tariffs on imports will limit supply options and allow U.S. producers to raise prices without pressure from lower-cost foreign alternatives. Past cost trends support this conclusion, as steel prices peaked and only stabilized after U.S. trade agreements, as shown in the Federal Reserve Economic Data (FRED) chart below.
While much of the extreme price volatility in 2021 was driven by pandemic-related supply chain issues, U.S. steel prices remained higher than global averages even after supply chains recovered, reflecting the lasting impact of trade restrictions and an increased demand for steel. While subsequent trade agreements in 2022 led to price stabilization, the current tariffs are expected to drive up costs once again.
With the construction industry representing 47% of steel consumption in the United States, the sector is particularly vulnerable to price fluctuations, as noted in this Tax Foundation analysis. The American Institute of Steel Construction (AISC) notes that approximately one ton of steel is required for every 200 square feet of building area on average, and even this estimate does not fully capture the total steel usage in industrial development, where the demand is significantly higher than in other types of construction.
Beyond serving as the primary material in industrial construction, steel is also integral to the machinery and infrastructure that supports a manufacturing facility. As a key component in building frameworks, equipment, and utility infrastructure, the cost of steel has a direct and substantial impact on overall budgets. While these tariffs are designed to support U.S. steel manufacturers, they introduce new challenges for companies looking to expand or build new facilities.
How site selection strategy can offset rising construction costs
When selecting sites for a new facility, it is essential to consider the broader economic impact of rising construction costs and focus on certain strategic factors that can help offset it:
1. Existing Facilities vs. New Builds
Given the rising cost of building new facilities from the ground up, some companies may decide that retrofitting or expanding existing facilities is a more cost-effective alternative to new construction. In this case, companies will need to analyze the potential of older facilities or speculative development that can serve their intended use. While buildings may still require investment, this option may offer a way to sidestep the rising construction costs associated with steel.
Challenge: For manufacturers with specialized processes, finding a suitable existing building can be a significant challenge. Older facilities often require extensive rehabilitation or were designed specifically for their previous occupants. Likewise, speculative developments on the market are typically open-shell spaces that may not accommodate a company’s production layout or operational needs. Additionally, the utility infrastructure in these buildings is often built for lower-demand operations, requiring costly upgrades for projects with higher utility demands. As a result, manufacturers must either invest in major retrofits or embark on a difficult search for the rare facility that meets their needs, a process that can feel like looking for a needle in a haystack.
2. Targeting Cost-Effective Areas
Depending on the parameters of the expansion, targeting areas with lower business costs could significantly offset the financial impact of rising steel prices. Companies with high utility usage, for example, can benefit from locations where energy and water rates are more competitive, helping to reduce overall operating costs. Additionally, some regions may offer more favorable tax environments that allow businesses to reinvest savings into other areas of their projects, such as construction or equipment. By selecting areas where these factors align, site selectors can help companies maintain a more cost-effective balance in the face of rising prices for materials.
Challenge: Many of the areas that offer a favorable business environment through lower taxes, energy costs, payroll, and other operating expenses are often located in rural regions that face workforce shortages. This creates a fundamental tradeoff between operational savings and access to skilled labor. To make a sustainable site selection decision, manufacturers must carefully evaluate long-term workforce availability alongside cost considerations, ensuring the location can support both immediate and future production needs.
3. Construction Incentives and Local Economic Factors
States and local governments offer incentives to attract new investment and the creation of jobs, which could help balance out the rising costs of steel and other materials. Property tax breaks, grants, and infrastructure development incentives could offset some of the increased construction costs, especially in regions with a strong focus on economic development and manufacturing.
Challenge: These incentives are becoming increasingly scarce as communities have struggled to keep up with the surge in manufacturing growth over the last decade, especially in the past five years. Even when incentives are available, they come with strict requirements for job creation, capital investment, and regulatory compliance. Companies must carefully track their commitments and adhere to state and local guidelines to ensure they receive the full benefits, making incentive management a critical component of the site selection and development process.
Conclusion
The steel tariffs set to affect the U.S. construction and manufacturing sectors in 2025 present a unique challenge for companies with plans to grow. As steel prices rise, careful site selection will become even more critical to mitigating the increased costs. By strategically considering factors like repurposing existing facilities, targeting areas with lower operational costs, and leveraging local incentives, companies can reduce the financial strain caused by rising steel prices.
Site Selection Group provides a full spectrum of services, including the evaluation of key economic factors such as operational costs, infrastructure, labor availability, regulatory requirements, and more. We also assist companies in navigating the complex landscape of economic incentives, ensuring they maximize available tax breaks, grants, and infrastructure support while staying compliant with state and local requirements. By managing all aspects of site selection, we help companies identify the optimal location while minimizing project risks and costs.
