Tariffs on Chinese Imports and their Impact on the American Commercial Real Estate Industry

- Jason Gordon

 

While I’m not sure that the average American spends part of his day wondering how tariffs on Chinese imports might affect the American commercial real estate sector, I am steeped in the title industry, and sadly, have little choice. (Please hold back the tears.) As with most economic issues this complex, there are differing views among politicians. And opinions as to the impact of this trade protectionism has birthed some very unusual alliances across the American political spectrum. 

With the Trans Trade and Investor Partnership (TTIP) between the United States and the European Union reporting major progress, and the new U.S Mexico Canada Agreement (formerly known as NAFTA) already signed, attention is now focused exclusively on China; the world’s second largest economy by far. And it is here where tensions are rising, with little compromise being reported. China has taken a more aggressive course than our Western allies by levying counter tariffs on American imports to their country. The Trump administration’s justifications for the imposition of tariffs on China are many, and include long term theft of U.S. intellectual property, the extreme American trade imbalance with our Asian competitor, that Chinese tariffs far exceed ours, and the protection of blue-collar U.S. jobs, which he believes have been undermined by cheaper, government subsidized Chinese imports.

As alluded to earlier, the administration’s tariffs on China has produced some strange bedfellows. With the Democratic Party historically viewed as the protector of the working class, many of its most prominent and progressive members have enthusiastically supported Trump’s policy. Among them are Senators Bernie Sanders, Chuck Schumer (Forbes, 7/2/18), and Hillary Clinton CNN Business, 8/11/16). It is the Republican Party that has been the staunchest proponents of free trade and open markets They are overwhelmingly opposed to what they see as a dangerous protectionist policy. 

The irony here is that the current Republican president who the Democratic Party deplores more than any other in memory, are some of his strongest supporters on one of his major policies. If the tariff issue wasn’t so fraught with danger for both the economy and the CRE sector, this scenario would be comical. 

But what is the bottom line? What will be the impact of the tariffs and the resulting trade war on the U.S. commercial real estate industry?

According to a September article by the real estate giant, JLL (JLL 9/6/18), chief economist, Ryan Severino offers a sober analysis: “The tariffs … are an added expense  that drives down demand for goods, which in turn drives down the demand for warehouse space to store those goods.” But Severino doesn’t see the effect as urgent at this point: “Nonetheless, the impact won’t unsettle the boom the industrial property sector has enjoyed in recent years …” However, he warns of greater danger to the real estate sector may be approaching if the trade war continues to intensify: “If the administration moves forward with more widespread tariffs, then the impact would be more severe.” Demand for industrial space would be dented and, therefore, industrial asking rents could fall.

The Omni Realty Group’s Mike Kushner, an economist by training, takes a less restrained, and even more pessimistic view of the repercussions of the trade war for the commercial realty sector (Central Penn. Business Journal, 8/8/18). “It’s reasonable to expect an increase in both permanent debt costs and construction costs. Higher prices for commodities, like steel, will hurt construction and infrastructure projects. The U.S. is already seeing more than a 5 percent materials inflation in construction, and given these recent actions, it’s reasonable to predict this number could rise as high as 10 percent.” Kushner emphasizes that commercial real estate is of central importance to the overall health of the U.S. economy. He warns that beyond the rise in construction costs, an extended trade war will have a “significant, negative impact on both local and national commercial real estate.”

In a September 19th article, BISNOW’s Tara Lerman concurs: “Commercial real estate is expected to take a substantial hit from these tariffs. Increased construction costs, coupled with the tariffs’ impact on foreign investment, could turn commercial real estate on its head. As countries like China respond to U.S. levies with retaliatory tariffs, uncertainty around a looming trade war has prompted several investors and developers to back out of deals or prevented them from moving forward.” 

Unlike their political counterparts, economists are in unison. The professional opinions given above are shared by the vast majority of economists from across the political spectrum. It is actually difficult to find respected people in the profession who support high tariffs as part of a trade policy. This is the fact whether the economist works in the real estate sector, or not. (Forbes 12/23/16)

But the sharply increased U.S. tariffs on Chinese imports are now a fact of life. My own view is that while it is true that some of the arguments put forth in support of tariffs, especially Chinese government subsidized dumping of cheaper commodities on U.S. markets have severely harmed many blue-collar American industries, and that the Chinese do, in fact, impose tariffs more than twice as high as ours (Pew, 3/22/18), the administration should nevertheless set specific, more modest goals to be achieved in stages. After all, our industry (like all others), is buoyed by stability, not uncertainty. And the precise impact of radically raised tariffs on the real estate sector and the economy, at large, is unknown. But the broad consensus of opinion is that significant harm is likely if the trade war lingers on.

Some level of short-term compromise, where the Chinese offer some concessions, as negotiations begin, is vastly preferable to an extended, all out trade war. China’s stock market has dropped about 20% in the past year, and the yuan has weakened significantly against the dollar. While other factors may be partially responsible for the weakening Chinese economy, there’s little doubt that the tariffs have taken a serious toll. 

China, therefore, may be quite ready to offer some concessions, as their economy has been hurt by the exchange of tariff hikes far more than ours has. It’s time for compromise. 

As I’m just about to send this article out for formatting for the newsletter, the news is reporting that Presidents Trump and Xi have reached a tariff truce. The Chinese have agreed to import significantly greater amounts from the U.S. mainly in agriculture and energy. They have also agreed to lower duties on American made automobiles. In Exchange, the U.S. has agreed to not increase tariffs for at least 3 months.

Apparently, the two presidents managed to get an early copy of this article and heed its final paragraphs – or not.