How Will New Tariffs Affect Commercial Real Estate?

Last month the United States imposed a second round of tariffs on Chinese goods. In turn, China retaliated with its own tariffs on US goods. While the goal is to increase production in the US, increase jobs, and decrease the trade deficit, there may be negative consequences to this action in the foreseeable future. US consumers have benefited from inexpensive goods from other countries for many years. Even if jobs and wages increase, we may see inflation wipe out any growth in buying power that higher wages would normally lead to.

I recently spoke to a builder in Traverse City who said it costs his company 20% more this year to build an industrial building than the same one they had built last year. Tariffs on imported building materials have been the major contributor to price increases, but also a tight labor market and longer lead times are raising costs. Economics 101 teaches us that when prices soar demand will fall. Projects that may have made financial sense a month ago may be too expensive to build currently. If there are fewer projects moving forward and significant increases in pricing, we will see downward movement in the economy. This will mean there is less warehouse space needed for the storage of building materials—putting a downward pressure on industrial prices and rents.

On the flip side, if the economy continues to be strong and we see fewer buildings being built because of soaring costs, there will be a price increase in existing buildings due to the need for additional space and the lack of new options. The revised NAFTA agreement (now the United States Mexico Canada Agreement – USMCA) should also help the industrial sector as we see more growth from automotive and logistics companies that benefit from new provisions of the trade deal. In an ideal situation, the economy will be so strong that it can absorb the increasing prices and new construction will continue, just at a higher cost.

As we are dealing with the effects of trade tariffs, the federal reserve has been slowly increasing interest rates. The goal is to help stave off inflation and keep the economy growing at a healthy pace. If this works as intended, it should help the economy; however, tariffs on steel, aluminum, and lumber will have the opposite effect—causing inflationary pressure. The higher cost of raw materials not only leads to higher construction costs, but also gets passed on to consumers in higher prices due to businesses paying more for their materials, factories, warehouses, offices, and retail locations. It is very possible we will see a reduction in the growth of the gross domestic product if inflation occurs quickly. In the worst-case scenario, as more tariffs are imposed and prices increase, inflation may lead to an economic recession. In our best-case scenario, economic growth outpaces inflationary pressure and the economy weathers the price increases.

With potential outcomes ranging from increased wage growth and a stronger economy to increased prices and another recession, it is difficult to predict the future. However, we do know that we have increased uncertainty, which translates into increased risk. When risks rise, businesses and investors tend to take a wait-and-see approach, keeping new investments from being made. While this may stifle growth in the near-term, we will need to take a wait-and-see approach to find out how the commercial market will fare over the longer-term.

 

- Dan Stiebel, CCIM

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Dan Stiebel

Dan Stiebel

Associate Broker
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