Dealing With Uncertainty With The Increase Of Tariffs

Tariff Worries Add a Post-election Wrinkle

All of us in the business community deal with uncertainty no matter what condition our local, state and national economies are in. Every business decision we make involves a calculation of risk, but we can mitigate that risk through our level of knowledge about those factors most likely to impact profitability. In a rapidly expanding economy, risk may be minimized by the natural rise in demand for our product or service. We certainly experienced that in the commercial real estate sector after the market bottomed out in 2010. However, after the longest industrial property upcycle in history, the economy experienced a nasty inflation spike starting in 2021, which forced the Fed to raise the cost of capital to put out the fire. That sent industrial property demand sharply lower and flattened pricing growth for both lease and sale product, as a corresponding rise in uncertainty sent buyers and tenants to the sidelines. However, we have yet to experience a full-blown correction in most major submarkets, the Inland Empire being the exception due to high levels of construction. So, when asked, we have been describing current conditions as sluggish, slightly out of sync, but with election uncertainty behind us.

However, just last week, a new wave of uncertainty hit the headlines with the announcement of across-the-board tariffs on all of our nation’s trading partners. Equity markets responded with a sharp decline, and media coverage of the White House’s decision has largely been critical, at least in the media. That said, at this point no one knows what the ultimate result will be for the US economy, but it is safe to say that a lot of business owners will be scratching their heads over how this economic shock will affect their operations. That uncertainty may slow industrial property activity even more. First quarter market metrics were released before the tariffs were announced, and they show the industrial market on the same trajectory as all of last year; lower transaction volume and downward pricing pressure, but still short of correction territory.

What all this means to you is unique to your circumstances, the business sector you’re in and who your customers are. We know from our interaction with the business community that many of you are doing better than ever while others are still grappling with the fallout from two years of high inflation, excess regulation and other challenges.

If you are a tenant currently in the market for space, conditions are in your favor. Rents are down almost 8% year-over-year, concessions are up and there is more high quality space on the market than there has been in years. You can expect some rent abatement and landlord willingness to construct tenant improvements, especially if they are not specialized to your use and can add value to the space for future tenants.

If you have space to lease, you should position your property to be the next one that leases in your area and size range. Time is working against you. Vacancy is still moving higher, so you are likely to have even more competition for tenants to choose from if you push too hard and lose a deal. If you have a building for sale, you can still command a price near the peak of late 2022, but it will take longer to sell because there are fewer buyers in circulation due to high mortgage interest rates. Owner/user deals using maximum leverage just don’t pencil like they used to with mortgage rates above 6% versus 3% in the good ol’ days. Buyers are in the toughest position right now because we have not seen the expected price correction in response to sharply higher interest rates. So, monthly occupancy costs based on today’s mortgage payments on highly leveraged deals are much higher than a monthly lease payment for comparable space.

While we recognize the potential for significant economic fallout from a protracted trade war, it is important to evaluate recent events as they relate to you specifically rather than get caught up in the media frenzy. It’s just too early to count on any particular outcome. If you have a requirement in process, keep looking for that perfect space while you monitor current events. You are not committed until you sign your new lease.

Landlords should move as fast as possible, as the events of the past week have not changed the trajectory the market has been on for the past two years. Likewise for sellers. Prices hit their peak due to low interest rates and there is no evidence that rates will be coming back down again soon to reignite the upcycle. If you have plans to retire in the short term and your building is integral to your retirement plan, stay with the plan and take action sooner rather than later.

We are here to help you decide what’s best for you. Just give us a call.