Trade tariffs: How will they affect our industrial and commercial real estate markets? - by Ralph Perna

November 06, 2018 - Long Island
Ralph Perna,
Newmark Knight Frank

Needless to say, since taking office, president Donald Trump has conducted himself outside the box of political conduct and how a president typically conducts himself. Certain facts, however, cannot be denied.  The stock market is at an all-time high, unemployment is at the lowest level since 1969, and the U.S. is taking on new allies, for example, North Korea with denuclearization. Trump has exhibited a novel way of getting his point across.

Rumor has it that in Trump’s private-sector life and his dealings with others the battle is never over.  Similarly, his tough guy approach and bully demeanor are taking center stage in his negotiations with overseas governments in an effort to level the playing field. Currently, the main battle ground is China with a war on trade tariffs now playing out 

Trump’s recent success has been with the new Mexican/Canadian trade agreements. The agreement primarily focuses on the food, dairy and automotive industries, and it is certainly providing the U.S. with some advantage.

But what will be the outcome of the U.S.’ battle with our largest trading partner, China, and what will be the long-term effects on our economy and real estate markets? Can the new imposed trade tariffs on approximately $200 billion worth of goods become the start of a new era?

Over the years, U.S.-based companies, both large and small, and particularly, Long Island companies, have depended on Chinese manufacturers for their products. The costs for imported goods have always been considerably less than those produced by U.S. manufacturers. Who is to blame for this, and have our trade deficits become uncontrollable?

Enter Trump imposing new tariffs as an attempt to penalize manufacturers based in what he has deemed nations with unfair trading partners (i.e., China), preventing many of these companies from stealing our technology, and then using our technology against us. Trump’s goal is to make U.S.-based companies more competitive and, true to his own words, “Make America great again.” This is why he is planning to impose trade tariffs of between 10-25% on specific imported goods.

Over the last several months, I’ve spoken with many Long Island-based companies asking whether these tariffs will have a direct effect on their company’s future plans and bottom-line. A high percentage of the companies I spoke with are not sure if they will be able to absorb the additional costs, if profits will decline or whether the additional costs will be passed on to the importing company’s distribution chain or a combination of splitting the tariff cost, with the importing company’s distribution chain. The fact is, we will all have to take a wait and see approach.  At the end of the day, the extra costs will trickle down to the consumer, inflicting higher prices and potentially driving inflation and slowing down economic growth.

This being said, what we can expect for our industrial and commercial real estate markets?

I do not think increasing tariffs will have any debilitating effect on our real estate industry. The companies that have expanded over the last several years have created the lowest vacancy factor in the industrial market since I can remember in my 43 years in the industry. With very little new speculative construction, there are not many options available for expanding companies. Understand, companies need a place in which to conduct their operations, and unless something catastrophic occurs politically or there is an unforeseen financial event, I do not foresee any long-term negative effect.

 The market for well-located buildings in good condition is still very active and I believe this will continue. However, what I like to stress to the property owners who want to lease or sell their buildings is to stop raising prices.  Let us not get to the “Tipping Point.” Instead, let the market settle and let’s see what the next stage will be.  If anything is going to slow down the market, it is going to be the prices on properties for sale or lease.  I believe, and I have seen it before, unrealistic prices will place expanding companies on the sidelines where they will take a wait and see approach.  Ultimately, the rise in prices to lease and purchase buildings will have more effect on our real estate market then imposing tariffs.

Regarding my previous remarks on the Trump approach to negotiations, it may very well be that these tariffs are a short- lived negotiating tactic by the White House, and if that is the case, my opinion is that our economy will continue to grow.

Stay tuned!

Ralph Perna is an executive managing director at Newmark Knight Frank, Melville, N.Y.

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