Real estate, alternative real assets and other diversions

Trump Tariffs and REITs The Art Of The Chinese Tariff Deal

The Fund Manager

President Trump announced new tariffs this week on around $200 billion in Chinese goods, and Mr. Market just shrugged it off, as The Art of The Deal was old news.

In fact, tough negotiation was a common thread running through President Trump’s New York Times best seller, as he explained, “I’m the first to admit that I am very competitive and that I’ll do nearly anything within legal bounds to win. Sometimes, part of making a deal is denigrating your competition.”

The new tariffs take place on September 24, initially at 10% and later increasing to 25% at the end of the year. China fired back, announcing tariffs of 5% to 10% on $60 billion worth of U.S. goods. 

With the U.S. economy soaring to record highs, it seems that President Trump is leveraging the nation’s cost of capital advantage, playing tough as he did when he wrote in The Art of The Deal, “But my experience is that if you’re fighting for something you believe in — even if it means alienating some people along the way — things usually work out for the best in the end.”

The billionaire real estate investor has created significant wealth by negotiating hard and pushing back, and it seems that the latest round of threats could disrupt and level the playing field. In The Art Of The Deal, Trump wrote “I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.”

As the trade war heats up, business owners remain on edge, concerned about the impact on costs. However, United States real estate does not have much to fear. 

Most U.S. REITs, which are known for being inflation hedges, luck out in this scenario as they remain shielded from international trade and currency risks. Parker Rhea of Chilton Capital Management forecasts a majority of REITs will outperform the S&P 500. “[Even] global and industrial REITs are currently more consumption-facing and driven by durable secular shifts in technology than ever before.”  

Rhea’s Chilton Capital Management report explains that the two standout impacts the tariffs are expected to have on real estate property values will be in terms of revenue and cost. The new levies could drive losses in current or potential revenue for property owners due to reduced demand for their properties or tenant bankruptcies. 

However, the property owners susceptible to these losses only include those with current or potential tenants “with high exposure to goods that are on the U.S. or foreign tariff lists” and “have current or near-term vacancy risk.” On the other hand, the tariffs could hike up development and redevelopment costs for landlords, especially hard costs, like steel and lumber. 

These hard costs are already on the rise. Costs for hot-rolled band steel for delivery to U.S.-based and non-U.S.-based customers along with framing lumber started its growth in 2016, only to continue steadily through this year. 

Rhea added that he expects the winning REITs to outweigh the losers once the tariffs are enacted. REITs slated to prevail in the storm include those for data centers, multifamily buildings, high-rise offices, single-family rentals, cell towers, self-storage facilities, listed REITs, existing properties and consumer-facing properties. 

For investors in tech REITS, Rhea recommends they focus on long-term demand. “While several of the largest cell tower and data center REITs have the highest international exposures of any REITs, we recommend that investors ignore short-term currency noise and focus on the long-term drivers of demand for tech REITs with network-dense portfolios that are less focused on new domestic development.” 

Multifamily residential and single-family rental REITs are on track to benefit from the replacement cost increases. The increased construction costs will drive the value of existing assets while making “renters less likely to move out and buy their own homes.”  

Class A office REITs with young portfolios in large gateway cities, like Boston Properties, SL Green and Vornado Realty Trust, will actually benefit from steel tariffs. Mega projects and skyscrapers in dense urban centers, including the reconstruction of the World Trade Center and Related’s Hudson Yards development in Manhattan, are expected to drive this success. They both have had to import a majority of their largest steel beams from Luxembourg because domestic steel mills cannot produce them.

The Fund Manager

About Brad Thomas

Brad Thomas

Brad Thomas has been a nationally-acclaimed Forbes author, speaker, thought leader and advisor in the commercial real estate industry for over three decades. He is the author of The Trump Factor: Unlocking the Secrets Behind the Trump Empire and the co-author of The Intelligent REIT Investor. Thomas is the founder and editor of the Forbes Real Estate Investor (monthly subscription-based newsletter) and senior analyst at Rhino Real Estate Advisors. Brad tweets at @rbradthomas

Articles by Brad Thomas

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