From Jersey To Long Beach, Trade War Can’t Dim Industrial Prospects On Coasts
August 5, 2019
Tariffs on Chinese goods have been rattling the U.S. economy and worrying the real estate industry. Already faced with astronomical construction costs, developers are concerned that a spike in the price of steel and other building materials could severely hamper their businesses.
But in the ports where building materials and consumer goods are imported, real estate prospects are still looking up. While experts agree that a long-term trade war could be detrimental to the industrial markets along America’s coasts, so far, demand for warehouse space has not dipped. Instead, it keeps increasing as a result of the need for last-mile industrial space.
“So far, businesses have been able to eat the cost of the tariffs, so in the short term, industrial looks fine along the coast,” said Jonathan Eshaghian, an investment sales agent at Marcus & Millichap, specializing in industrial properties in the five boroughs of New York. “Long-term, the trade war could knock 20 or 30 basis points off of the GDP, but industrial is so strong right now, we’ve hardly seen any effect yet.”
While the round of tariffs in March 2018 targeted Chinese commodities and industry-specific materials like aluminum and steel, the following rounds in September 2018 and May 2019 increased prices on Chinese-made consumer goods, like furniture and electronics. If those tariffs stay in place, Americans may begin to buy products made outside of China.
According to Marcus & Millichap’s special report on the trade war, it will take months for the effects of that discretionary spending to be felt in the economy, and longer for it to affect industrial markets. A drop in consumer spending will first have to trickle through retailers and distributors. The report claims the short-term effects will be muted, but most strongly felt in late 2019.
“First, we would expect fulfillment centers to hire fewer people, and then we would expect prices for warehouse space to begin dropping,” Eshaghian said. “But that’s not what we’re seeing, job growth and sales prices have stayed steady.”
Deal flow and investment have remained strong for industrial assets in Eshaghian’s home markets of Queens, Brooklyn and Staten Island, as well as in New Jersey. He added that his colleagues in Los Angeles and Long Beach, who stand to be more directly affected by a trade war with China, have also not reported a drop in industrial demand.
What has sustained demand for industrial assets throughout the U.S. — not just along the coasts — is the need for last-mile warehouse space to facilitate overnight online delivery. The expectation of two-day or one-day delivery is so ingrained in American life at this point that industrial space should continue to be in high demand even if the trade war drags on.
“It’s not just Amazon that needs this space,” Eshaghian said. “It’s companies like FreshDirect or Peapod. It’s a part of everyday life now for many people, and they will probably continue to spend their money on it even if it becomes pricier.”
If it continues for more than a year, the trade war will probably force American companies to begin redrawing their supply chains, buying from countries other than China. Vietnam and Indonesia have already become large beneficiaries of the protracted tariff battle, as they provide alternative sources of consumer products. On the Atlantic side, Eshaghian said, Britain could become a powerful trading ally, especially if the nation leaves the European Union.
Even if tariffs endure, Eshaghian said coastal industrial markets like Queens, New Jersey and Long Island will continue to thrive thanks to their proximity to consumers. In these markets, industrial redevelopment has been strong, he said, and more land will likely be turned into warehouse space.
These coastal markets could also be given a boost from investors who are leaving the multifamily sector after the news that rent regulation would be expanded and protected across New York State.
“There’s a lot of capital floating around since investors are shying away from multifamily properties,” Eshaghian said. “It might come toward the industrial market and affect pricing there.”
For former multifamily investors in New York City, he said industrial was a great way to diversify. He shook off the idea that industrial would be touched by the trade war within the coming years, but did say that investors may have to rethink their strategies if the tariffs continue beyond 2019.
“Short term, I’m bullish,” Eshaghian said. “Long term, it depends.”