Recent trade negotiations between the United States and China have resulted in the raising of tariffs from 10 percent to 25 percent on many Chinese imports in May of 2019, which prompted fears in the construction industry that certain materials would increase steeply in price. These fears were allayed to some extent on May 17, 2019, when President Trump lifted the tariffs previously in place for steel and aluminum coming in from Canada and Mexico. The increased cost of Chinese materials, however, is expected to have a significant effect on the cost of commercial real estate (CRE) in the next few years.
An Increased Cost of Doing Business
Depending on the duration of the increased tariffs and the trade war between China and the United States, CRE investors can expect to see increases in the cost for new construction and in the overall cost of doing business for all types of real estate and commercial investments. As new commercial projects increase in cost, contractors are likely to scale back their plans and take on fewer new projects. This will create a seller’s market in the commercial real estate industry.
Higher Prices for Commercial Properties
As demand for commercial properties begins to exceed supply, prices will begin to rise. Depending on how dramatic the shortfall in properties becomes, the cost of CRE could soar precipitously over the next three to four years. This will create hardships among some companies that require added space for expansion or that are looking to relocate in the near future.
Adjunct Costs Also Rising
Along with basic materials like steel, aluminum, and other metals, the tariff on Chinese goods will also have an impact on floor and wall panels, cabinetry, appliances and other necessary items for commercial properties. The overall impact is not yet measurable but is expected to be significant and to create serious issues for construction firms looking to make a profit in the next few years.
Added Costs for Consumers
Along with the added costs expected to impact the commercial property market directly, the increase in Chinese tariffs has been estimated to cost an average of $767 annually for a family of four in the United States. This is because when President Trump originally imposed these tariffs, he billed them as a means of job creation in a dwindling industry. The tariffs helped boost the steel industry but it came at a cost to American consumers and businesses who are now paying more than $900,000 a year for every job saved as a result of the steel tariffs created by President Trump.
Reduced Investments by China in the U.S.
The tariffs will also have an effect on the amount of investments made by China in commercial real estate projects in the United States. Recent investment statistics indicate a consistent downward trend in these investments. In 2016, China invested more than $16 billion in U.S. real estate projects. By 2018, that figure had dropped to $2.3 billion.
By keeping a close eye on these emerging trends, commercial property investors can protect their financial positions. This can allow greater flexibility and liquidity for investors in the current real estate marketplace.
