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Since taking office, President Trump has pushed on a lot of fronts to renegotiate trade deals.
One of his first actions in January was signing an executive action to pull the U.S. from the Trans-Pacific Partnership (TPP). In late March signed two more executive orders involving trade. The first focused on tougher enforcement of existing trade treaties, potentially renegotiating the North American Free Trade Agreement (NAFTA) and strengthening the U.S. stance against currency manipulation.
The second executive order directed the Commerce Department and U.S. trade representative to produce a comprehensive report within 90 days to identify “every possible cause” of the U.S. trade deficit. Once completed, the report’s findings will serve as a guide for the Trump administration’s future trade policy.
This week the Trump administration gave Congress official notice that it plans to renegotiate the North American Free Trade Agreement (NAFTA).
He’s even pushed on trade deals at the wrong times, for example mistakenly thinking German Chancellor Angela Merkel could negotiate on behalf of the European Union during their meeting in April.
What could all of this mean for commercial real estate?
A new Cushman & Wakefield report, “The Impact of Trade Policy on the Industrial Market, identifies possible fallouts from the Trump Administration’s escalating series of protectionist measures. It identifies dangers including higher prices/inflation, less free movement of labor, elimination of the benefits of specialization, decreased capital flows, slower net migration and weakening global growth.
In terms of NAFTA specifically, the Cushman & Wakefield report noted that negotiations will most likely address changes in rules and trade provisions to address advancements in technologies involved in auto and auto part manufacturing and e-commerce. It would also affect cross-border data transfer and automation of customs procedures for imports and exports as well as U.S. access to Mexico’s oil.
David Bitner, a Cushman & Wakefield senior director and head of Americas Capital Markets Research, and Jason Tolliver, vice president and expert in industrial real estate, say they believe any changes in free trade agreements that raise barriers to trade would tend to have a negative impact on overall economic and employment growth.
“Retailers would be particularly affected and would pass on higher costs to consumers,” Bitner says. “In commercial real estate, this would deepen the crisis in retail and would sound a sad note in what has been a triumphant period for the industrial property market.”
Bitner adds that more than 410,000 U.S. companies, 98 percent of which are small- or medium-size firms with less than 500 employees, are now engaged in international trade. As a result, warehouse stock has increased by 3.5 billion sq. ft. since NAFTA became effective January 1, 1994.
Bitner stresses that any renegotiation of NAFTA should seek to strengthen the U.S. relationship with Mexico. According to the U.S. Census Bureau, Mexico buys more from the U.S. than any other nation, with its imports amounting to nearly $231 billion.
The U.S. International Trade Administration reports that jobs supported by goods exports to all current U.S. free trade partners grew by almost 560,000 between 2009 and 2015 and 400,000 of the jobs were supported by goods exports to NAFTA partners. Overall, goods exports to free trade agreement partners supported almost 3.1 million jobs in 2015, of which 2.2 million of those jobs were supported by exports to NAFTA partners, noted the Cushman & Wakefield report. “In both cases, the increase in jobs was largely the result of an estimated 296,000 increase in jobs supported by exports to Mexico.”
In the same time span, free trade agreements also resulted in a 26.3 percent increase in bilateral trade with partner countries, with exports increasing by 3.6 percent, while imports only rose by 2.3 percent, reducing deficits by $87.5 billion. Additionally, U.S. real GDP grew by $32.2 billion, up 0.2 percent, and real wages increased by 0.2 percent. Furthermore, free trade agreements saved $13.4 billion in tariffs.
Should the Trump administration impose a 20 percent tariff on imports, it would generate billions of dollars for government coffers, but consumers would be the losers, paying significantly more for products.
“NAFTA heightened security and is a significant driver of import-related demand on the West Coast,” Tolliver says. “De-escalation of durable imports through ports will happen if NAFTA goes away,” he adds, pointing out that this will affect industrial real estate, as well as jobs.
Since Trump took office Tolliver says there’s been a slowdown on the leasing side, mostly associated with Mexican trade, as users have decided to wait and see if new regulations are forthcoming and how they would impact international supply chains and ports of entry.
The Cushman & Wakefield report noted that trade is one avenue where slow economic growth elsewhere, particularly in top U.S. merchandise export markets, can reverberate back to the U.S. economy and property markets.
Fear of a trade war leads to a pullback in pricing, Bitner says, so on the capital side, it would create opportunities for investors given the low probability of this outcome and the robust fundamentals supporting the industrial property market.
“We’re seeing cap rates increase due to the rise in interest rates and uncertainty,” he adds, noting that the national average industrial cap rate has risen 80 basis points since bottoming in the third quarter of 2016. “However, at 6.6 percent, yields are still low by historical standards and similar to pricing seen in early 2015.”
In import-related markets, there’s strong demand for industrial product and limited supply, Tolliver says, noting that Los Angeles has the strongest industrial market nationally, because it’s the biggest import market in the U.S.
According to a report from the Los Angeles County Economic Development Corporation, the Port of Los Angeles is the top U.S. for value of goods imported, with imports in 2015 of $270.6 billion. When combined with cargo moving through the Port of Long Beach and Los Angeles International Airport (LAX) the total value of goods is $468.3 billion.
“Low vacancy and strong rent growth are driving investment sales in this asset class and historical low cap rates,” says Bitner, “And I don’t see a lot upside in cap rates, subject to variations in submarkets.”
The Southern California industrial market reported strong activity, with Transwestern reporting investment sales of $570.2 million in the first quarter in Los Angeles and Ventura counties, up 24 percent year-over-year. Los Angeles County experienced over 12.1 million sq. ft. of leasing activity in the first quarter alone, according to a CBRE report, with expansions outpacing move outs, for a total of 1.6 million sq. ft. of positive absorption.
Overall vacancy countywide dropped 10 basis points to a record low of 1.1 percent. As a result, the average asking rent grew by 3.7 percent during the quarter to $0.76 per sq. ft. per month overall and to $0.86 per sq. ft. per month in the South Bay submarket near the ports and LAX.
“This has been a very different, non-typical cycle,” Tolliver says. “Over the last three years net absorption has been the strongest I’ve ever seen—19 markets had one million sq. ft. of net absorption, but developers have been very disciplined, with limited new product delivered. … We haven’t seen spec development outpace supply in primary markets, but national supply will meet demand in late 2018.”
Tolliver adds that occupiers are targeting modern, functional space with overhead height.
The U.S. would, over time, regret a trade war with China, he says.
“When you look at the demographics of China’s growing middle class, by 2026 its consumer will be larger than the entire U.S.,” Tolliver says. “To sell into that market is a huge opportunity.”