How Trade Wars Affect CRE, the Economy

How do trade policies affect the real estate industry? Economist Hugh Kelly surveys lessons from economic history and looks ahead to the likely impacts.

There is a centuries-old concept in ethics called “invincible ignorance.” It applies to situations where a person simply doesn’t know enough to make a moral decision, and therefore should not be held fully accountable for harms arising out of such ignorance. The concept, however, leaves open the question about whether that ignorance is just a matter of circumstance or whether, on the contrary, the ignorance is grounded in an unwillingness to gather the needed information or even an apathy toward the facts. 

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Hugh Kelly, PhD., Economist
Hugh F. Kelly, PhD, CRE

Because of this, logicians for the past half-century have spoken of the “invincible ignorance fallacy.” This fallacy is described as deliberate ignorance, which simply allows a person to argue by making unsupported assertions or by claiming an opponent is simply making a conjecture, regardless of any examination of evidence. It is a fallacy because it is empty logic, mere rhetoric that cannot be proved or disproved since it is grounded in emotional force rather than commonly recognized data. That common ground is what supports rational discussion. As Daniel Patrick Moynihan stated a generation ago, “Everyone is entitled to his own opinion, but not his own facts.”

Right now, U.S. trade policy is grounded on such ignorance, going under the label of “economic nationalism” and pushing back against the “globalization” that has brought the world (and America) unprecedented prosperity since the post-World War II economic order was put in place. While it would be hyperbole to claim that economic nationalism is wreaking havoc as of yet, it certainly has been a potent disruptor and its net effects on the economy as a whole have been negative. And real estate is not exempt from its baleful impacts.

Flow of good(s)

To be clear, globalization is not without its “discontents,” drawbacks that have been lucidly detailed by Joseph Stiglitz over the years. Economic expansion worldwide has brought costs to segments of the American economy, including the sunsetting of some industries and adverse pressures on some U.S. labor markets. However, on a net basis, it is hard to argue against the evidence that even with these economic costs fully accounted for, the U.S. economy has had estimable strength.

Since 1949, the real economy has expanded 785 percent, an inflation-adjusted growth rate of 3.2 percent annually over seven decades. The results for the past quarter century have been somewhat slower, but still 2.5 percent annually in real terms, leading to 87 percent more GDP in 2018 compared with 1993. Not too shabby. Real estate has ridden this wave quite nicely—as the 4.3X increase in the NCREIF total return index since the first quarter of 1993 shows.

Globalization recognizes that in a world increasingly integrated by technology, it is “economic flow” rather than “economic stock” that energizes commerce. Energy is kinetic. It is all about change. That change entails the flow of people, the flow of goods and the flow of capital. Those flows are what generate the network of interactions that make success not simply about one’s share of the pie, but the growth of the pie itself.

Such growth has not come willy-nilly but has been supported by a realization that, de facto, the economic world is a complex adaptive system, not a mere amalgam of bilateral contracts. In turn, de jure, that system depends upon multi-partner agreements aimed at mutual benefit. The hallmark of the system is collaboration, not dominance. It recognizes imperfection as inherent in human affairs, and proceeds from the premise that making progress entails some frustration but is not compatible with either isolation or unilateral force.

That is why matters like Brexit, the current U.S.-China “trade war,” and antipathy toward immigrants—including refugees and asylum seekers—are so detrimental to economic growth. Stanching the flow of people and creating frictions on the flow of goods are expressions of defensiveness, inimical to energy of change, and hence detrimental to innovation. Joseph Schumpeter stressed that innovation (which is not just mechanical invention but making that invention economically viable) and then diffusion across markets drive capital success. While we may have a tremendous stock of available capital at the moment (all that “dry powder” we hear so much about), barriers to the flow of people and goods limit the economy’s ability to put that capital to productive use. Of that relationship, the economic nationalists appear to be invincibly ignorant.

Objectionable outcomes

What does it mean for real estate? A slowdown in demand across property types. Already we see job growth, the fuel for user demand in offices, housing, and (through the income effect) retail declining by 27 percent in the first seven months of 2019. From January to July 2018, the U.S. averaged 227,000 new jobs monthly. Over the same period in 2019 average employment growth was just 165,000 per month. And Congressional Budget Office projections see further declines ahead.

In retail and in logistics, tariffs slow the volume of goods flow while simultaneously putting upward pressure on consumer prices. For construction, restricting immigration exacerbates labor shortages and restrictive trade raises the price of intermediate goods. Together, these make development costs rise faster than general inflation, diminishing feasibility for all but the upper end of the property market.

Agricultural land values have fallen since 2017 in Kansas, Nebraska, Colorado, the Dakotas and Minnesota, and rural America continues to depopulate. On the capital side, the yield curve inversion discussed over the past two years in this column has become a reality during the first half of 2019, raising recession expectations and thereby reducing investment incentives.

Despite all this, I do not counsel despair. Facts are stubborn things and the ignorance behind economic nationalism will ultimately surrender to the evidence. The only question is this: How much unnecessary pain will we need to experience before that surrender?

Hugh F. Kelly is director of graduate programs & chair of the executive advisory council curriculum committee at the Fordham University Real Estate Institute, and chair of the institute’s executive advisory council curriculum committee. He is a principal at Hugh F. Kelly Real Estate Economics, a consultancy. Kelly is the author, most recently, of 24-Hour Cities: Real Investment Performance, Not Just Promises (Routledge/Taylor & Francis).

Read the September 2019 issue of CPE.