The Impact Of U.S. Trade War On Commercial Real Estate

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The U.S. trade war has reached new heights in recent months. Though the correlation between tariffs and commercial real estate may not be immediately apparent, experts have become increasingly concerned with the potential impact of the U.S. trade war on commercial real estate across the U.S, including commercial real estate in Orange County.

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Chinese Investment in U.S. Markets

In recent years, Chinese investors have been pouring money into the U.S. commercial real estate market. By the year 2016, Chinese investors had invested approximately  $46 billion in the United States. Many investors focused their capital along the Pacific Coast, such as commercial real estate in Orange County.

However, with the advent of the U.S. trade war, China’s central bank has slowed international capital outflows. Accordingly, Chinese investment in U.S. markets has been declining. In the beginning of 2018 alone, Chinese real estate investments in the U.S fell by approximately 90%, demonstrating the dramatic impact of the U.S. trade war directly on real estate.

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Construction Costs        

The U.S. construction industry heavily relies on other international suppliers for raw materials. In the midst of the U.S. trade war, the Trump administration has placed tariffs on raw steel, aluminum, and lumber- primary construction materials. Specifically, importers to the U.S. were hit with a 25% tariff on steel and a 10% tariff on aluminum.

Under many circumstances, tariffs actually benefit the U.S. economy by making untaxed domestic goods more affordable and more likely to be purchased. However, the initial impact of Trump’s tariffs resulted in a substantial shortage of construction material, thus directly affecting commercial real estate development. Domestic suppliers scurried to fill the void, but at a price. The cost of commercial construction material considerably spiked over the past few months. And what’s more, the price of construction supplies remains extremely volatile making it nearly impossible to accurately estimate the cost of construction.

Merchants such as Home Depot and Lowe’s, well-known construction and home improvement retailers, are believed to be some of the most adversely impacted sellers, demonstrating the impact of the tariffs directly on construction. The spike in construction costs further cuts profit margins hindering certain commercial real estate developments.

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Retail and Office Space

The U.S. trade war has another, less direct impact on commercial real estate. The rising tariffs are said to substantially slow job growth in the United States. Commercial real estate will indirectly bear the costs the fluxes in the U.S. job rate. The office vertical is particularly sensitive to fluctuations in employment statistics. A decline in job growth could result in office vacancies and instability in office rents.

Additionally, many retailers, including large conglomerates such as Walmart, Macy’s, and Best Buy are directly affected by the tariffs. Commercial real estate will further endure the impact in retail, warehousing, and industrial spaces as price increases begin to affect consumption in the United States.

The Impact

Perhaps the greatest impact of the U.S. trade war is uncertainty according to  JLL Economist Walter Kemmsies. The precarious nature of the U.S. trade war has made calculated decision-making challenging. Commercial real estate is dependent on yield. Projects must pencil, material costs must be accurately calculated, and vacancies must be limited.

Many investments and property management companies are adept in optimizing property efficiency despite fluctuations resulting from the U.S. trade war. Companies such as The Kelemen Company are precise in their ability to weather market cycles and unexpected circumstances involving commercial real estate in Orange County, California.