Influential trade decisions and tariffs, such as the ones affecting the prices of steel and aluminum, have a long-reaching effect on thousands of businesses in the United States, including those in the commercial real estate industry. Although the long-term effects of these tariffs will be unknown for a while, we can at least make educated guesses on what is most likely to happen based on previous data and the input of various industry experts.
Let’s take a closer look at how these tariffs might affect the commercial real estate industry.
Pressure on Commercial Construction Prices
Since the tariffs were announced in March, some industry experts have said that they have seen a 10% increase in the price of steel. While this leads to concerns about the costs of construction, the consensus among experts seems to be that cost escalation is the result of a lack of skilled labor, not the tariffs (at least, not solely, as data does indicate a correlation between steel prices and construction costs).
Notably, demand for commercial construction is still strong at the midpoint of the business cycle. Barring any significant developments, the deal flow should maintain a “normal” pace. One potential consumer impact, though, is higher rent—more construction costs mean that newly constructed buildings, in particular, need to recoup these unexpected costs.
The Impact on Port Cities
Because of the tariffs imposed on China (and the Chinese tariffs on the US), some experts fear that the following port cities could be adversely impacted, in addition to many others across the country:
- Long Beach, California
- Los Angeles, California
- New York/New Jersey ports
- Savannah, Georgia
- Wilmington, North Carolina
In fact, some reports estimate that hundreds of thousands of jobs could be affected, leading to a negative ripple effect that could affect local economies as well as regional real estate investment and development.
Currently, though, the above port regions have yet to see any market distress. The effect may be gradual; as a result, experts are keeping a close eye on Los Angeles, which, given its size, would be a leading indicator that the market is in trouble.
Looking at Real Estate Investments
While many world markets have reacted negatively to news of a possible trade war, only 4% of total US trades are currently affected; in other words, the US equities markets have been far less reactive. Notably, though, pending/threatened tariffs may swell affected US trade numbers to 22%, a much more significant outcome.
In terms of commercial real estate, direct real estate investments are typically much less volatile than other asset classes. For risk-adjusted returns, these investments surpass all comparable alternatives. Overall, experts have noticed that investors have been dropping out only because of a combination of near-record highs and greater overall volatility, not trade tensions. In fact, when investors do exit equity markets to reinvest funds into commercial real estate, they seek deals with a reasonable certainty of cash flow instead of speculative situations such as development.
Final Thoughts
Based on the disparate pieces of information we’ve collected from several industry experts, it appears that only one thing is clear: we will need to keep a close eye on the commercial real estate industry to see how or if the implementation of steel and aluminum tariffs will adversely affect construction and related markets. For now, though, it is business as usual for those of us involved in the commercial real estate market.
Contact us today for more information and insight on how steel and aluminum tariffs could affect the commercial real estate industry.
