Trade War Brings Uncertainty to U.S. Commercial Real Estate
China tariffs bring short-term concerns for construction and infrastructure projects, as well as key commercial real estate property sectors.
On Friday, U.S. President Donald Trump announced tariffs on $50 billion dollars in Chinese imports, escalating a trade war between the world's two largest economies. While this move may prove to have several long-term economic and political benefits, commercial real estate professionals should watch several key factors in the short term, says CCIM Institute Chief Economist K.C. Conway.
“It is as high a stakes game as it goes in economics, and we haven't really seen it at this level since the Nixon era and price controls,” Conway says.
“Commercial real estate professionals should prepare for a 10-Year Treasury of 3.5 percent - 4 percent and higher permanent debt costs, as well as higher construction costs, which may make buying and enhancing existing assets rather than new construction the better investment play,” he adds. “These higher prices for commodities like steel hurt the automotive industry, as well as construction and infrastructure projects. We are already seeing more than 5-percent materials inflation in construction and I think, given these recent actions, it may rise to 10 percent.”
Conway also expects GDP to fall below 3 percent this fall, even though the third quarter is normally the strongest of the year. “However,” he points out, “if Trump prevails, we are on for 4 percent GDP in 2019 with exports rising.”
For now, however, Conway expects these tariffs and counter-tariffs to only add to the now elevated 2.8-percent annual inflation that caused the Fed to raise rates in June and provide guidance for two more hikes in 2H2018.
“We are heading into a full blown, tariff-led trade war,” Conway explains. “It's complicated, but the underlying issues hold U.S. security and economic power in the balance. The public doesn't appreciate the complexities. Trump is tackling an issue as tough as healthcare. The good news is that consumers are yet unphased. As with North Korea, we have to wait and see how this quintessential Trump shot-across-the-bow strategy will play out over the summer.”