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After more than a year of tit-for-tat trade negotiations between China and the U.S., making sense of all the rhetoric and tariff adjustments has just about everybody scratching their heads, including U.S. real estate experts.

Last week, President Donald Trump raised tariffs from 10% to 25% on Chinese imports in List 3 of Section 301 of the Trade Expansion Act of 1962. That list includes many construction materials — including metals — and finished goods like floor and wall panels.

The picture shifted again on Friday when Trump ordered tariffs lifted on steel and aluminum coming from Mexico and Canada under Section 232, reducing the overall cost burden of tariffs on development. But Chinese goods are a major part of many construction projects and typically are less expensive than domestic or other North American materials. The new tariffs would impact $200B worth of goods, and Trump has said he might add tariffs on another $300B of Chinese imports, which would mean essentially all Chinese products were under a 25% tariff.

Bisnow asked two dozen commercial real estate experts around the U.S. if (and how) the increased tariffs on Chinese goods could impact CRE. Their responses varied from those who see the increase as insurmountable for construction budgets to those who see the tariffs as actively beneficial for the industry. Some experts aren’t worried but said they will become so if the trade war drags on. Here are their responses, in their own words.

*** Henry S. Miller Cos. CEO Greg Miller | Dallas

It will take some time before we know the full effect of President Donald Trump’s tariffs on our commercial real estate market. Tariffs on steel and aluminum have been in place for over a year now. All predictions were that we would see an increase in construction costs. However, we haven’t seen any impact on our construction projects. The new round of tariffs on Chinese goods may indirectly impact commercial real estate to the extent that it negatively affects our tenants’ cost of doing business or consumer spending. If the trade war is short-lived then I suspect it will have little impact but a prolonged trade war may have adverse consequences.

*** Roadside Development co-founder Richard Lake | Washington, D.C.

It’s devastating. It really just dramatically increases the cost on everything from steel to finished goods, cabinetry, appliances, everything, because you almost practically take [China] out as a supplier. … We try to go domestic but then costs go up. You can’t buy products because costs are so prohibitive. … So as you have regulations and other things that drive costs up, a lot of projects are on the edge. I know projects all up and down the East Coast that have had an effect from construction cost increases. We all work from the margins. If the margins get thin it does have an impact.

We’re lucky, we bought most of the job [for City Ridge] already, but you’ve got to keep your eye on it. We’re all one big global market. If China steel costs more, then domestic steel costs more. It does have a big impact, and as costs go up it goes off to the consumer and projects don’t get done. Land gets affected by price increases, rents get increased, everybody pays. It’s an absolutely foolish anti-business strategy of playing games with tariffs. It’s absolute insanity.

*** Gelt Inc. partner George Wu | Los Angeles

A short answer is yes, tariffs on Chinese goods will impact commercial real estate in the United States in almost every aspect [and] affect almost every player in this industry.

Here are a few examples: 1. From the development standpoint, costs will increase. Gelt has two multifamily development projects here in LA totaling 430 units. We use a lot of Chinese products such as floors, cabinets, lights, power switches, etc. We bought these products from U.S. importers. It is foreseeable that the cost of these products will increase; thus our hard cost will increase as well. At this moment in time, we could not find plausible substitutes for Chinese products as U.S.-made products’ price is often at least 30% higher than Chinese products.

2. On May 10, Governor of the Federal Reserve Lael Brainard said that, “One-third of middle income adults say they would borrow money, sell something or not be able to pay an unexpected $400 expense.” A CNBC report shows that the current 25% tariffs on Chinese goods would cost a U.S. family of four $767 annually and lead to a loss of over 934,000 jobs. So it is foreseeable that if measures are not taken, we will … see an increasing number of the homeless.

3. The increased tariffs will cause a continued decrease in Chinese investment in U.S. CRE. Chinese investment in CRE used to be huge just a few years ago. In 2016, Chinese companies invested over $16.2B. It dropped to $7.3B in 2017. In 2018, that number decreased again drastically to $2.3B. What’s more, Chinese companies sold $3.1B in assets last year. The decrease is largely due to Chinese restrictive regulations on investment in U.S. real estate.

*** Savills Chief Economist Heidi Learner | New York City

While the 25% tariffs imposed on steel in March of 2018 have largely worked their way through the supply chain, the impact of the recent increase in tariffs from 10% to 25% has yet to be felt. In addition to steel, materials subject to the 25% tariff now include stainless steel and iron, molded glass paving blocks and tiles as well as lead, nickel, building stone, cement and copper.

Items critical to HVAC infrastructure are also part of the new tariffs (from air compressors to heat pumps), as are interior materials for flooring, walls and furniture. It’s likely that importers and other domestic manufacturers who rely on many of these items as inputs to their finished goods will not be in a position to absorb the entirety of these cost increases. Expect to see new commercial construction and renovation costs rise (even if such renovation is largely cosmetic in nature).

*** East West Partners managing partner Amy Cara | Denver

We are in the process of evaluating this for ourselves as we speak. Certainly there will be cost increases; it really depends on the trades and whether the components of our buildings we are sourcing come from China or not. We don’t buy cabinets and finishes from China, for example, but other developers may be, and if they are, the question will be if they can match that product at the same price. We don’t yet have feedback about what might have an impact in our budgets, but it is certainly something that we’re watching as we look toward our next buildings. Even 1% can be millions of dollars when you think about condominiums, apartments or office buildings of any scale.

*** Mount Vernon Co. Chairman and founder Bruce Percelay | Boston

I think it is premature given how fluid the situation is. It would not surprise me if in two weeks the whole matter is resolved as neither party involved can afford a trade war. I also suspect we may end up on top after all is said and done.

*** Daniels Real Estate President Kevin Daniels | Seattle 

It has been significant and we are scrambling to look for other sources of materials, FFE [furniture, fixtures and equipment], etc. It has blown our budgets and may cause our projects to delay or put on hold. Ignoring politics, the president couldn’t be more tone deaf on how tariffs impact the U.S. China doesn’t pay them as he keeps saying, U.S. residents do. He clearly has no understanding of thousands of years of Chinese culture or he would have approached this negotiation differently. This isn’t an episode of “The Apprentice.”

*** C.W. Driver Cos. Senior Vice President of Estimating and Preconstruction Steven Nelson | Orange County

Tariff penalties and import quantity reductions imposed a year ago on structural steel and aluminum products have been absorbed by the construction market with overall annual increases ranging from 7% to 11%. Ramped up domestic production of these items has started to soften these materials by 1% to 3%. The latest tariffs will have a heavier impact on finished goods such as appliances, fixtures, etc. We feel these latest tariffs will have an immediate impact on price, but will stabilize and reduce when the market stabilizes.

*** Callahan Construction Managers Vice President of Business Development Steve Callahan | Boston

While there is no way to accurately predict the potential impact of Chinese tariffs, from a construction standpoint, we don’t anticipate a very significant increase in overall cost. For much of the construction process, prices already account for the uncertainty. That said, if there were to be a major shift in pricing, we’d anticipate a shift in design, with the use of Chinese products excluded from planning and design moving forward.

*** Dreien Opportunity Partners CEO Sam Ware | Dallas-Fort Worth 

Initially, yes. Believe it or not, it’s actually a good thing. Our markets have been white-hot for the last several years. This will help slow things down which would be painful initially, but will add another 12 to 24 months to the cycle in my opinion. It will increase the value of existing buildings with no or low occupancy, same thing with homes people will look to acquire those versus building new. Tightening occupancies will benefit all product types, across-the-board in my opinion. End of the day China and America will get this resolved, which will be better for everybody over the long term. STAY TUNED.

*** Skender Project Executive Joe Pecoraro | Chicago

I believe new tariffs will affect the construction industry and CRE market. Following trade talks breaking down last week, we’ve already received notices from vendors that if tariffs go into effect, materials will immediately have price increases. One material that comes to mind are flooring goods that are manufactured in China. When the goods hit the port, they’ll be subject to that cost, and the flooring vendors across the board have indicated that this will end up being passed along to the consumer. So, vendors are trying to control the escalation. If they took a little bit of risk six months ago, they need to pass along that the tariffs will cause immediate and substantive price increases.

Even as far back as the beginning of 2018, the biggest effect of tariffs on materials like steel and aluminum has been the uncertainty. A vendor or subcontractor will usually determine a price that is set for 90, 60 or 30 days but when you call them four or five months later, they can work it out to be close to that initial price. Vendors and subs are less willing to do that now because of the increased risk and inability to know what’s going to happen with the tariffs.

None of us are expert economists, and the uncertainty has made the industry more risk averse. With the increases on goods, vendors and subs don’t want to be the ones paying for that, so it comes down the line to hit the consumer’s pocket.

When the market is as busy at is, vendors are going to see an opportunity to raise prices just in case — and if enough of them do that, that’s the new market, whether the tariff hits or not. That’s been frustrating, since we procure labor and material from vendors and subcontractors. There are several layers between the good and the consumer — manufacturers to distributors, distributors to subs, subs to contractor, contractor to consumer — and any one of those stakeholders could have the hot potato when the tariff hits. Because of that, we can’t be certain about the cost of a project until the tariffs go into effect.

*** Marker Construction Group President Peggy Marker | Miami

The tariffs will impact CRE in many potential ways. For the construction industry, the potential increase in cost on materials, such as concrete and steel, will directly impact all mechanical, electrical and plumbing costs, affecting the overall construction cost. In addition, the tariffs will drive up demand and cost for the same domestically sourced products, as well as with other countries that have more favorable trade terms.

South Florida will be affected differently than the rest of the country because of our building codes. Specifically, the Miami-Dade hurricane codes that we have here prohibit certain types of construction and demand more rigorous standards to withstand hurricane force winds. In the northern region, a large percentage of construction is wood frame. Since they use wood frame, they will not be impacted as much because they do not have such a large demand for concrete and steel. This will enable them to keep their construction costs in line, whereas the costs in South Florida will be directly impacted because we use concrete and steel.

*** Foulger-Pratt Chairman Bryant Foulger | Washington, D.C. 

I’ve had conversations with a few large general contractors. Right after they announced the first tarriffs, they had quite a few subcontractors immediately increase pricing. But when the GCs pushed back and asked for some clarity and transparency, it turned out the price increases weren’t really there and it was kind of a knee-jerk reaction from subs.

We’re pricing a large office building in the D.C. area. I know subs going back a couple weeks agreed to hold their prices but not for very long, just for a few weeks. That’s not necessarily just about tariffs, that’s about a market where there’s quite a bit of demand for construction.

They’re locking in materials. I think everybody knows we’re seeing construction prices driven by labor and materials, we’ve seen those increases well above the rate of inflation. There is pressure to try and manage costs. When you’ve got subs that have work and pipeline it’s in their best interest to lock in material prices as early as they can.

*** Larry DiCara, lawyer and former Boston City Council president | Boston

Tariffs imposed upon China might sound patriotic, but they will result in more expensive consumer goods for Americans and will also impact the cost of construction.

*** Pattillo Industrial Real Estate CEO Larry Callahan | Atlanta

Real estate decisions are big decisions. Tariffs add friction to commerce and additional threatened tariffs add uncertainty. Uncertainty is the enemy of confidence.

Imposed tariffs add unexpected costs. This disrupts the supply chain and it is not always possible to shift to another supplier immediately. And if companies do shift to another supplier to avoid paying the tariff, the total cost of the substitute product is usually higher than the company was originally paying. So, somewhat higher prices can edge inflation upward.

The success of commercial real estate rests on strong demand for functional space from the whole array of space users. If space users experience uncertainty or disruption, it slows their decision making and weakens their confidence.

So, tariffs have almost no immediate impact on a stabilized real estate investment, but continued substantial tariffs are disruptive to business and a weakened tenant base would hurt real estate in the long run.

On the other hand, one purpose for these tariffs is to provide leverage to get China to provide protection for intellectual property in line with international standards. If the tariffs are brief and the Chinese reform to adopt western intellectual property standards and increase the flow of international commerce, the gain could be worth the pain.

The duration of the trade war and the scope and durability of any ultimate agreement introduces caution into decision making. It would be good for everyone if the trade war was short.

*** Cox, Castle & Nicholson partner Gregory Karns | Los Angeles

I think there will be an impact, most directly and immediately in the form of increases in the cost of building materials coming from China, which will have an impact on commercial real estate development and redevelopment projects. A less direct consequence would be the impact that this sort of uncertainty creates.

I think in this climate, people are less inclined to make significant new capital commitments, because the outcome is now subject to a trade policy which is unpredictable and beyond the investor’s control. This could translate to a slowdown in business spending in general, which I think will impact the flow of new capital into commercial real estate.

*** O’Connor Capital Partners President Joel Bayer | New York City

If they do not reach a deal in 2019, there could be some major consequences. If this happened there could be a large increase in cost of building materials resulting in an increase in construction costs. This would slow down new construction and expansions. Of course it would also lead to an increase in the value of existing assets.

*** JLL Senior Vice President Joe Iatauro | Atlanta

With recent changes in tariffs and trade, manufacturers are acutely aware of keeping costs down so as not to pass these higher costs on to the consumers of their products. The development of industrial properties in commercial real estate markets with close proximity to ports and major airports expect to benefit the most from these changes.

*** Akridge founder Chip Akridge | Washington, D.C. 

We haven’t bought any new construction for about a year before the tariffs went into place, so I don’t really know the actual impact it’s going to have. We have 100 V that we’re looking to get started next year and that first phase is 1M SF. There’s a lot of exposure there on that particular project. Everything else we’ve had under construction for at least a year, some more than that. We’ll be getting back into the construction purchasing market later this year or early next year, and at that point, I’m sure the results will be coming in and people will be getting a feel for what this means for us.

*** Avison Young principal Todd Mason | Houston

Probably not a large impact in the short term, a few weeks or months, but if it drags out for six months or more it will impact tenants who are importing and exporting goods to and from China.

*** University of Massachusetts Donahue Institute Senior Research Manager Branner Stewart | Boston

Housing has become increasingly out-of-reach for the workforce and housing production in Massachusetts is a fraction of what it needs to be for our population — the fastest-growing in the Northeast. The trade tariffs on China will make an already challenging situation even worse by driving up the costs of construction materials, making the costs of new housing and home renovations even more expensive than they already are. This combination will worsen affordability and further dampen housing production — the very opposite of what the Commonwealth needs right now.

May 19, 2019 by Bisnow Team on bisnow.com