Donald Trump's Tax Increase/Tariffs
The Tariffs war between the United States and China are already affecting the commercial real estate industry, and it could potentially cause vacancy rates to increase and drag leasing and sales prices down; in addition, dragging the economy down with it.
President Donald Trump increased Tariffs from 10% to 25% on $200 billion of Chinese products imported to the U.S. on May 10, 2019. This may cause a downturn in the commercial real estate industry and the economy.
What effect has tariffs had on the commercial real estate industry since President Trump began charging tariffs? The President put 25% and 10% tariffs on steel and aluminum imported from China, Canada, Mexico and the EU in March 2018. As a result, construction raw material costs have increased forcing an increase in commercial real estate development costs.
The construction industry has felt the hit from the added costs to potential new contracts. As a result, new commercial real estate prices will escalate. What do we expect in the future from 25% increase on almost all products from China?
The cost of goods and services are going to increase; as a result, consumer spending may decrease in the U.S., because the goods will be too expensive. Consequently, people will stop buying products or find alternatives.
In retaliation, China has put tariffs on U.S. products. Consequently, China may stop buying U.S. goods. As a result, manufacturing in the U.S. may slow down. Employees may get laid off further slowing the economy.
Vacancy rates in industrial, retail and office space will go up. Rent rates will go down; as a result, the property value of commercial real estate will slide with the market. Currently, the U.S. industrial market lease rate has increased to new highs, according to a Los Angeles Industrial MarketView Q1 2019 report by CBRE.
Industrial rents in the country have increased 8% year over year. The current Industrial vacancy rate in Los Angele is 1.4%. That is the lowest industrial vacancy rate that I have seen in my 40 years of working in the commercial real estate industry.
Online shopping should decrease with the increase in tariffs to China’s products. As a result, shipping companies won’t need as much Industrial space. The vacancy rate will increase, and the price of industrial real estate will decrease. The same scenario will be seen in commercial office space and retail.
The cost in construction prices will increase; as a result, litigation will increase if the tariff increase was not mentioned in the original contract. The parties involved will argue about the cost and result in litigation. We have seen this after the steel and aluminum tariffs in 2018.
The latest increase in tariffs may send us into another recession as seen in the past. The inflation increases; as a result, interest rates will increase. Real estate sales will decrease, development will decrease, because the cost to develop commercial and residential real estate will be too high. This will hurt the lower and middle working class mostly with the higher unemployment rate and increased cost of living.
The above comments are only intended if the US/China Tariff wars are not settled quickly. The longer both countries argue on trade tariffs, the more detrimental it will be to the U.S. economy and Commercial Real Estate.