May 17, 2019
By Paul Bubny
The U.S. and China have turned up the volume lately on the rhetoric when it comes to tariffs, with both countries vowing to impose higher tariffs on billions of dollars of one another’s goods. The potential for an escalating trade war between the U.S. and China comes at a time when the global economy doesn’t need the disruption, the New York Times reported.
“An escalation scenario would be terrible all around,” Gabriel Sterne, head of global macro research at Oxford Economics in London, told the Times. “A negative impact on trade flow is going to be bad for global growth for several years. It’s bad news for almost everybody.”
Time to panic? Not so fast, say CCIM chief economist KC Conway and Real Capital Analytics’ Jim Costello.
“While the trade dispute and ratcheting up of tariffs on China is a serious matter with economic consequences, the panic being flamed by some that the economy will collapse, unemployment will skyrocket and commercial real estate will plummet into a 1929 or 2009 abyss again is irresponsible—and more anti-Trump rhetoric along the lines of what we heard last summer at the onset of the 10% tariffs,” says Conway.
When the U.S. imposed 10% tariffs on Chinese goods last summer, some headlines proclaimed that the economy would soon collapse. “What happened? A ‘Boom & Vroom’ economy happened, and the tariffs were a marginal nick in some of the best corporate earnings that we have seen in more than a decade,” points out Conway, director of research at the Alabama Center for Real Estate.
At RCA, SVP Costello says it’s way too early to gauge the impact of the trade dispute on commercial real estate. “The transmission of this trade shock to the activity of tenants, how they do and do not invest, how that change in investment impacts their decision to use space, how that change impacts the underwriting assumptions of investors and lenders, how those changed assumptions impact sales and ultimately market pricing—it is a long and complicated path,” he says.
“Ultimately, it will reduce the level of economic activity because tariffs are taxes on consumption, but again, tracing the impact to commercial real estate will take some time,” adds Costello.
In the meantime, Conway offers “some reality check points” on what higher tariffs will and won’t mean. For one thing, he says, “The supply chain is adjusting, and goods and materials are finding different routes to mitigate the full impact. Some China-based manufacturing has and continues to move to South Korea and Vietnam. Whole factories don’t need to move.”
Second, regardless of the tone of Beijing’s rhetoric, “China needs trade with the U.S.,” says Conway. “It exports/sells 4X to us as the largest economy in the world, and will desperately need our agricultural goods—like pork—later this summer.”
Third, not only is China not the only game in town for U.S. cross-border trade, it isn’t even the biggest. “North America is the largest trading partner for the U.S.,” Conway says. “That is why we need to ratify the USMCA/NAFTA 2.0 trade agreement.”
Ratification of the agreement “assures our economy and our neighbors to the north and south of everything that we each need, from agricultural goods and lumber, to rare earth minerals and potash for agriculture to assembled auto components and steel for our auto industry,” says Conway. “Ratify USMCA and watch how quickly a trade deal gets done with both China and Europe.”
Last, but certainly not least, “Commercial real estate is not going into the abyss again over tariffs,” Conway says. “First, more goods and materials will be stored in warehouses to assure manufacturers and retailers of no supply-chain disruption. I wouldn’t short industrial real estate or industrial REITs. Let the robot traders do that like last December, so the rest of us can make a lot on that bad short.”
Similarly, Avison Young’s Erik Foster doesn’t expect near-term fallout for the sector that in theory would be most vulnerable to escalating trade tensions. “Industrial investment volume will be strong in the long run as macro economic trends continue to be positive for industrial tenants,” says Foster, practice leader for Avison Young Industrial Capital Markets. “Most industrial investors believe these trade issues to be short term, so their appetite for acquiring industrial product is not waning.”
Looking at other commercial property types, Conway points out that demand is greater than supply. In addition to a housing shortage that demands more single-family and multifamily product, “office leases are longer in term, and it would take a prolonged period of 25% or higher tariffs to begin to impact office real estate,” says Conway.
Given that retailers can source and ship goods from pretty much anywhere, Conway doesn’t see that sector pulling in its horns over tariffs, either.
“And then let’s talk about banks and credit for businesses and commercial real estate,” he says. “Banks are not going to stop lending to real estate when we have an organic economy that is growing at more than 3% and an unemployment rate below 4%, and corporate earnings are this strong.”
For comments, questions or concerns, please contact Paul Bubny