How Will Trade Tension Impact Labor Market, CRE?

Continued wage gains aren’t enough to balance concerns over a trade war with China that could slow economic growth.
Ryan Severino
Ryan Severino

Tensions caused by the Trump administration’s proposed tariff increases of 25 percent on up to $50 billion a year of Chinese products are overmatching good news about the economy, according to JLL’s latest Economic Insight commentary, released last week and written by Chief Economist Ryan Severino.

After the White House announced plans to boost tariffs on about 1,300 products in the electronics, aerospace and machinery sectors, China threatened to respond in kind, with 25 percent tariffs on about $50 billion worth of U.S. goods. Though the first round of U.S. tariff hikes have not gone into effect, President Trump reportedly tasked a U.S. trade representative with assessing a possible additional $100 billion in tariffs on Chinese imports.

Short-term impact

The JLL report suggests that if both sides carry out their threats, “the tariffs could reduce GDP growth in the U.S. by up to 50 basis points over the next 12 to 15 months,” offsetting any gains from the late 2017 tax cuts. In the meantime, of course, market volatility has reflected broad concerns over the trade issue.

Though March’s job gains, and negative adjustments to the figures for January and February, weren’t all that had been hoped for, average monthly job growth for the first quarter nonetheless hit 202,000, notably ahead of the 2017 pace. And though unemployment remained 4.1 percent, year-over-year wage growth ticked up slightly.

Interestingly, the report’s author had expressed concerns regarding a trade war about 13 months ago, not long after the Trump inauguration, in his predictions for CRE investment performance in 2017.

The effects on CRE

What this all boils down to for commercial real estate, Severino wrote in the new report, is a “muddled picture.” Any fall in imports would directly harm demand for warehouse/distribution space, especially near major ports. Separately, Severino expects office vacancies to slowly rise over a five-year horizon, with net absorption unable to keep up with supply growth.

The labor market is expected to continue to tighten, leading to an acceleration of wage growth. “We are paying close attention to the inflation data this week and expect it to accelerate as temporary forces that restrained inflation last year subside,” Severino wrote.

If a trade war does arise, we’re likely to be in strange territory, Severino told Commercial Property Executive. “We haven’t seen a trade war in a really long time, so there isn’t likely to be much empirical research on trade wars and CRE.”

The report is available here.

Image courtesy of Ryan Severino