Trade Tensions Have Not Affected CRE. So Far

WASHINGTON, DC–The voices warning that trade frictions could eventually affect a still-sanguine Wall Street and the larger trend of strong economic growth are getting louder. On the same day that the US challenged five of its major trading partners at the World Trade Organization for retaliatory tariffs the International Monetary Fund warned  that the global expansion that began two years ago has plateaued and become less balanced. “We continue to project global growth rates of just about 3.9% for both this year and next, but judge that the risk of worse outcomes has increased, even for the near term,” it said.

Perhaps more worrisome to those in the CRE industry, BlackRock CEO Larry Fink said in an interview on Bloomberg Television that stocks could drop 10% to 15% and US gross domestic product would slow next year if the Trump administration carries through with all the trade threats it has lobbed.

Tit-for-tat responses by trading partners could lead to nearly $870 billion in total trade affected, accounting for a little more than 22% of US total trade and 5% of world imports, according to a new report by CBRE Capital Markets.

The timing of this trade fight comes as the US economy is the strongest that it has been since the Great Recession and world trade has been on a mild cyclical upswing [see chart].

An Industry Unscathed

So far, fortunately, CRE has come through this chaos relatively unscathed, according to the report. However, should the trade disputes escalate it will likely result in less demand for industrial space as US imports require more space than US exports. CBRE also made this point: “Disruptions to supply chains that were developed under the free-trade agreements may accelerate the automation of US industrial production, reducing the absorption of factory space.”

Already, it said, the stress from the trade uncertainty has started to show up in the manufacturing sector. CBRE wrote that:

Even though the Institute for Supply Management’s (ISM) manufacturing index rose to 60.2% in June from 58.7% in May, most of the increase was due to longer supplier delivery times, which rose to the highest level since 2004. What this essentially means is higher prices, a buildup in back orders and missed deadlines. Longer delivery times disrupt production all along the supply chain. Respondents to the ISM survey have clearly stated that tariffs on steel and aluminum imports that were imposed in March, as well as the threat of higher tariffs on other goods, have disrupted the availability and the price of getting needed materials and supplies delivered on time.

The Timing Of Bad News

CBRE also noted that the main drivers behind the US growth right now has little to do with import tariffs and much to do with the tax cuts at the end of last year and the still-low interest rates. Therefore it could be a while before the incoming data truly start to show the uncertainties and any potential slowdown associated with any potential trade war, it said.

As it happens, CBRE is dubious that events will snowball into an $870 billion trade war because once the collateral damage to the economy becomes clear it is likely that that President Trump will relax his stance. CBRE writes:

Many analysts believe that President Trump’s rhetoric is part of a negotiating strategy to improve the terms of trade. Perhaps the one factor that would truly force the president to rethink his strategy is if US financial markets, which have thus far been relaxed, show a degree of uneasiness regarding the current trade policy.