What impact could Trump’s tariff announcement have on CRE?
President Donald Trump moved to place a tariff on imported raw metals last Thursday and these new duties are already seeing economic reverberations, increasing volatility in the equity markets. But could they have ramifications on commercial real estate?
Trump’s announcement of 25 percent steel and 10 percent aluminum tariffs was intended to preserve steel production jobs in the U.S. and reduce the nation’s trade deficit. While it caught some off guard, it probably shouldn’t have.
“The announcement may have been a bit surprising and I think it shocked the market a little bit. But the position is not,” said Jason Tolliver, vice president Americas and head of logistics and industrial research at Cushman & Wakefield. “The president was very clear during his campaign … that this is the policy and the direction that they’re going.”
Time will tell whether the tariffs will achieve either of the president’s policy goals. Any impacts on commercial real estate may also take time to observe. But the implications could be significant, as 42 percent of U.S. steel is consumed by the construction industry and the price of steel mill products has increased 19.3 percent since March 2016, according to Cushman & Wakefield research.
In the near term, at least, CRE impacts should be minimal. “Right now, you have those who are in the position to wait and see maybe waiting and seeing what makes the most sense for them,” Tolliver said. “I don’t think you’ll see flood gates open, but I also don’t think you’re going to see people slamming on the brakes.”
Industrial in particular may be able to ride out any immediate economic impact of the tariffs better than other sectors. For one, warehouses use far more concrete than steel, in comparison to office and multifamily towers. The relative health of the sector may also be enough to float it for a while.
“You wouldn’t immediately see demand for warehouse product plummet. You wouldn’t see any change at all,” said Tolliver, noting that the U.S. industrial market is currently at a historically tight 5.1 percent vacancy rate.
This is particularly true of Chicago, which remains a robust industrial market. “It is the largest industrial market in the United States, and one of the largest in north America,” Tolliver said. “It’s incredibly diverse and has a lot of strong characteristics that will help it perform well.”
Though the Chicago metro area started to show signs of plateauing toward the end of 2017 with a decent amount of speculative product on the market, Tolliver expects the region to charge ahead despite any consequences of the tariffs. “Even if construction costs rise a bit in 2018, I don’t know that that is going to change the level of construction demand that you’ll see in Chicago,” he said.
While near-term impacts will likely be low, there are two main ways that the tariffs could impact commercial real estate long term. The first is an increase in raw material prices—accelerating a trend for inflated construction costs that has already been ongoing for years. Higher construction costs may in turn produce a sluggishness in new construction starts.
The second is ripple effects from an overall economic downturn with higher raw material prices being passed on to consumers. Industrial development has been on a historic high in recent years, due in no small part to e-commerce-associated warehouses and fulfillment centers. Consumers buying less could mean decreased demand for these facilities.
Any impacts on CRE, either near- or long-term, are hard to predict because Trump’s announcement hasn’t yet been codified. “It’s really difficult to know what the effect would be because there’s not a lot of clarity in terms of what exactly this will entail,” said Tolliver.
The long-term effects may come down to more than these two particular tariffs as Trump’s announcement last week might just be the opening salvo in a new trade war. The European Union responded harshly to the news, with European Commission President Jean-Claude Juncker promising “tariffs on Harley-Davidson, on bourbon and on blue jeans.”
“The WTO is clearly concerned at the announcement of U.S. plans for tariffs on steel and aluminum. The potential for escalation is real, as we have seen from the initial responses of others,” said World Trade Organization director general Roberto Azevedo. “A trade war is in no one’s interests. The WTO will be watching the situation very closely.”