by Rebecca Rockey, Economist, Head of Americas Forecasting
The recent rise in trade tensions between the United States and China has had minimal impact on commercial property markets. While much of the rhetoric has been in the form of threats, some tariffs have gone into effect, and progress to resolve some of the key issues at stake evolves from week to week. However, both the U.S. and Chinese economies have powered through the tariffs implemented to-date and effectively managed the political bluster often played through the media.
Does the current dialog presage future trade strategies, or will the often heated exchanges simmer down as the U.S. and China work towards mutually beneficial goals?
The Chinese economy expanded at a 6.8% pace in the first quarter of 2018, while the U.S. economy grew at a 2.2% pace. And despite some inflationary pressures that may arise from higher prices on imports, trade between the two countries continued to increase. Indeed, between March of 2017 and March of 2018, the 12-month moving average of China’s exports to the U.S. has risen by 11.3%.
Rising trade usually accompanies an expanding economic environment, and with the global backdrop on more solid footing since 2017, it is no surprise that even trade between the U.S. and China is growing at this healthy clip. Commercial real estate (CRE) demand, as a result of a rosier economic picture, has actually performed well and in some cases, re-accelerated. China has seen a record amount of office absorption since January 2017, when President Trump took office, and the U.S. has record-high industrial occupancy rates.
The constraints on the CRE markets are not arising from tariffs, at least not yet. Higher steel and aluminum prices will create cost headwinds for developers, particularly in the U.S., since the initial tariffs aimed at China were expanded to include our largest steel trading partners, Canada and the European Union. But this only is a drop in the bucket when viewed in tandem with rising labor costs and scarcity. Further, construction input prices, including that of land, have been rising significantly since 2016. Consequently, CRE development is not expected to falter solely as a result of steel and aluminum tariffs.
For China, tariffs on washing machines, solar panels as well as steel and aluminum are also not anticipated to have a significant impact on CRE fundamentals. Those goods represent only a very small share of total exports, and China is a minor trading partner with the U.S. on the steel front. China’s economy and CRE will continue to benefit from a rising middle class, expanding services industries and its Belt and Road Initiative.
Despite the effects being relatively benign so far though, the risk of a darker scenario is still looming. And the chances that increased tensions develop are rising. A full-blown global trade war—whereby most major economies increase tariffs to protect domestic industry while some engage in currency wars as a ‘do whatever it takes’ mentality sets in—would have adverse consequences for CRE. The disruption would roil financial markets, lead to a surge in uncertainty and volatility and disrupt global supply chains. The ensuing result could be a global recession with most global cities dependent on foreign capital suffering the steepest declines in pricing.
What is more likely is for continued threats and, as demonstrated today, actions that up the ante on each side. Today, President Trump imposed $50 billion of tariffs on select Chinese goods and China is expected to retaliate. The prices of some of the goods expected to be on the retaliation list had been falling (e.g., soybeans) as soon as the announcement was made on May 29, 2018. Although this is a step in an increasingly hostile direction, it is still far away from a global trade war.
Because trade wars represent a no-win situation, a widely accepted belief held by both economists and businesses, there is a high chance of avoidance. There may be more tariffs put into place, and trade negotiations will remain a source of uncertainty for months to come, in all likelihood. But, it is also quite likely that the two largest global economies will find compromises along the way.
Becky joined Cushman & Wakefield in January 2014 as the U.S. Economist. Before joining Cushman & Wakefield, she worked as a consultant at a finance and economics consulting firm in the DC area, primarily working on loss forecasts for a national housing finance company’s single-family, fixed income portfolio. Prior to that, she was a junior economist at the Congressional Budget Office in the Financial Analysis Division.