How can the current trade uncertainties potentially impact your real estate portfolio in the U.S. & Canada?
What at first seemed like hypothetical political rhetoric is now becoming part of reality. The recent headlines on trade spats between the U.S. and its allies, and between the U.S. and China, are creating a new arena of geopolitical uncertainty for businesses. The impact on the tariff-slapped industries is clear, but what could this mean for real estate investors?
- Warehousing and logistics-related real estate particularly vulnerable to trade implications
- Cost increases in the construction and retail sectors pose a threat as consumers are already price sensitive
- Wider economic implications could mean a faster pace of interest rate hikes
Not all sectors are created equal
International trade always produces winners and losers of varying degrees in each industry. It is no different for real estate assets. Changing the commercial dynamics between countries impacts the whole economy, which can subsequently affect the performance of real estate but some sectors are potentially more vulnerable than others.
Take the industrial space. Warehousing and logistics-related real estate (a large component of the industrial sector) is particularly vulnerable. Certain cities that depend heavily on being a cross-border transportation and storage hub are directly impacted by trade relations. Both revenue and occupancy could be reduced with a severed trade deal.
The flip-side is also a possibility. Areas that rely heavily on domestic distribution can experience an uptick as consumers substitute imported goods for what is affordable and available within the country. It is important that real estate investors are aware of their holdings’ exposure to changes in international trade, both geographically and by asset class.
It is all about the cost
The industrial example highlights the loss of business due to trade uncertainty. There is also the case of increased costs resulting from changing trade agreements. The U.S. imposing tariffs on Canadian aluminum and steel will directly impact construction costs, most typically in high-rise construction and other kinds of mid-rise starts. Developers may struggle to pass these additional costs on to the consumer in markets already sensitive to housing affordability.
As for other products in the market place, any higher retail price will add pressure to the already ailing retail sector. While e-commerce might also suffer from the difficulties in maintaining supply chains, price-sensitive consumers will readily avoid certain retailers if prices jump too high due to tariffs.
The ripple effect and what investors can do
Lastly, and potentially most impactful, are the wider implications to the economy. If trade hampers economic and job growth, real estate will subsequently suffer. That can come in the form of lower occupancy in the office space or lower asset appreciation due to a market slowdown. It could also lead to an uptick in inflation due to increased costs to the consumer, putting pressure on interest rate hikes.
The savvy real estate investor can potentially find opportunities in the struggling sector by buying when everybody is selling. Identifying areas that will experience an economic boon from the levies might also prove effective.
Ultimately, trade and political uncertainty highlight the importance of diversifying into different real estate assets--both geographically and sector-wise--to avoid too much exposure to trade issues. At the end of the day, the greatest insurance to avoid the potential problems due to unbalanced trade really comes with having a balanced portfolio.
Hawkeye Wealth offers investors access to Private Equity real estate with proven track records.