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September 6, 2018

As the tit-for-tat trade dispute between the United States and China escalates, investors are looking to warehouses for the first signs of a direct impact on the commercial real estate industry.

The U.S. this summer applied US$50 billion of tariffs on a variety of Chinese imports, with the second US$16 billion installment coming into effect in late August. China has retaliated in kind.

The tariffs – import taxes on goods from China – are an “added expense that drives down demand for goods, which in turn drives down the demand for warehouse space to store those goods,” says Ryan Severino, Chief Economist at JLL.

Nonetheless, the impact won’t unsettle the boom the industrial property sector has enjoyed in recent years amid a surge in demand from e-commerce companies vying for warehouse space. In the first quarter of 2018, this demand kept vacancy rates at a record low of 4.8 percent for the second consecutive quarter.

Still, the modest impact will be hard to dodge, with any reduction in demand shrinking rents. The tariffs are likely to lower real GDP growth in the U.S. by roughly 10 basis points over the next 12 to 18 months, in turn causing a drag of up to 20 basis points on the growth of industrial asking rent, Severino says.

A bigger challenge will come if the volleys intensify. The Trump administration is mulling tariffs on an additional US$200 billion of goods. Commensurate retaliatory tariffs from China would be on roughly US$60 billion of U.S. products.

“If the administration moves forward with more widespread tariffs, then the impact would be more severe,” Severino says.

What comes next?

If the White House follows through with the additional US$200 billion in tariffs, it would reduce real gross domestic product growth by 50 to 70 basis points over the next 12 to18 months, Severino says.

That would further dent demand for industrial space, particularly in coastal markets, where demand is largely import-driven. Industrial asking rents could fall by 50 to 100 basis points, he says.

Beyond that, the impact becomes less clear cut. Experts have warned that there is no end in sight, with neither Washington nor Beijing seemingly willing to back down.

In a July interview on CNBC, President Trump threatened to impose tariffs on every product imported from China. “I’m ready to go to 500,” he told the news station. The number was in reference to the US$505 billion worth of goods the U.S. Census Bureau said was imported from China in 2017.

Increases in tariffs on this scale “would begin to have serious negative systematic consequences for the economy and industrial market,” Severino says, “though they would be unlikely to trigger an outright recession.”

Construction costs

As the latest rollout of tariffs sinks in, the first round continues to send waves through the commercial real estate industry. The tariffs on steel, aluminum and lumber – which were imposed in the first three months of 2018 – have already increased the cost of construction, and have the potential to dampen development.

Softwood lumber prices have risen by 19.5 percent since July on a year-over-year, unadjusted basis, according to the Bureau of Labor Statistics’ Producer Price Index (PPI). Plywood has risen by 22.5 percent, milled steel products by 12.4 percent and milled aluminum shapes by 17.8 percent.

“Anecdotal evidence from clients suggests that it is already rendering some projects infeasible and slowing the construction pipeline,” Severino says.

“While the lack of construction could increase the value of existing buildings, due to supply and demand, it would no doubt dampen investment and economic growth.”

Click here to read about whether a free market in Cuba will spark a real estate investment frenzy.

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Ryan Severino

Chief Economist, JLL

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