While there can be ties between higher import costs and commercial retail space, the relationship isn’t as clear-cut, or black-and-white, as it might seem.
Tariffs are on everyone’s minds these days. The Trump Administration has made no secret that it is prepared to add more import taxes to goods from trading partners, with China topping the list. As of June, 2019, the U.S. had slapped tariffs in the billions on Chinese imports; the latest $300 billion in tariffs will have a direct impact on consumer goods. China, in the meantime, has set $110 billion on its own imports, while threatening additional qualitative measures.
The result of these actions has been doom-and-gloom panic, with the media and retailers predicting economic collapse. This concern makes sense; tariffs mean higher import costs; costs that are passed along to consumers. The higher the prices of goods, the lower the demand. This, in turn, could depress consumer spending, meaning fewer sales, job cutbacks and store closures. Given that empty stores aren’t optimal for commercial real estate investors, it doesn’t take much to understand that tariff increases can be problematic for commercial retail space.
But, connecting tariffs to retail real estate isn’t a black-and-white scenario. Economists are careful to point out that it’s too early to gauge the direct impact of tariff increases on consumer spending and, by extension, store space. Yes, though the news continues about retailers shuttering space and closing stores. There are plenty of other factors behind this trend, ranging from over-leveraging to online competition — though a prolonged trade war could exacerbate the already volatile retail scenario.
Currently, we observe companies creating new retail locations, whether it be restaurants or brick and mortar stores, faster than the speed of absorption. As long as this trend continues then we can still consider commercial retail a solid form of investment. For the time being, commercial real estate retail investors will still see low supply, high values, and compressed cap rates.
But long term, a prolonged trade war and accompanying tariffs could shift consumer behavior from discretionary spending (think big-screen televisions, furniture and appliances), with a continued focus on necessity purchases (groceries). It could also erode consumer confidence, and further curtail spending. The uncertainty could also have an impact on businesses and their investment/expansion plans.
In short, the answer to tariffs and trade wars on retail space is: It’s too soon to tell. A great deal depends on whether consumers will continue spending in the face of increasing costs. This favorable outcome also depends on how retailers will restructure supply chains to save costs in the face of a prolonged trade war.
As a hedge to the possibility of tariff increases, astute and incisive investors should seek out and consider putting their money in single tenant, NNN properties. These commercial investments take the risk out of the ever changing financial markets due to the length of the leases and credit tenancy. With 10 year Treasury Bills hovering at an abysmal 2% return, the NNN lease market will allow investors stable and profitable returns for years to come.
The views expressed here are the author’s own and not that of ALM’s Real Estate Media Group.