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The Trouble with Tariffs

How Tariffs Affect Commercial Real Estate

You’ve probably heard about tariffs lately. Tariff increases and subsequent fears about a potential “trade war” have dominated the news cycle. However, tariffs remain a point of confusion for many. Though complicated, business professionals (especially those involved in real estate) should strive to understand them. After all, a change in tariffs can influence your business.

Trade is an important part of the United States economy. When foreign countries purchase United States goods, new money enters the economy. In contrast, when the U.S. buys goods from foreign countries, money leaves the economy. Therefore, increasing exports and/or decreasing imports leads to economic growth.

In today’s globalized economy, the U.S. imports far more than it exports (a net difference of $651 billion in the third quarter of 2018). Because many foreign manufacturers produce goods at a lower cost, U.S. businesses buy from them. While businesses save money by purchasing foreign goods, domestic manufacturers see a decrease in sales. This may lead to factory closures and unemployment. To protect jobs and incentivize domestic purchases, the government turns to tariffs.

Tariffs are a tax on imported goods. Policymakers argue that by making imports more expensive via the tax, U.S. businesses will choose to purchase domestically. Money and investments, therefore, stay in the U.S. economy. This is the crux of the current administration’s tariff policy. However, presidents throughout history have used tariffs to achieve similar economic goals. While tariffs can benefit local manufacturers, tariffs can also dramatically increase costs for businesses that rely on foreign manufacturers.

The tariff rate directly affects the commercial real estate industry; particularly, the increase in steel and aluminum tariffs. Tariffs on common building materials make construction more expensive. A report from RSM US LLP, a Chicago-based tax consulting firm, argues that steel tariff increases “will curb the development of office, retail, industrial and multifamily building” and will make it harder for developers to forecast material costs. The report adds that “the lack of new development will continue to increase the values of existing real estate assets and limit the ability of developers to meet demand.”

Given these challenges, how should those in the industry respond? The key is to pay attention to current economic trends and take tariffs into account when doing long-term strategic planning. If tariffs negatively affect your business, voicing your concerns politically is also an important strategy. Concerned professionals can do this by supporting their professional lobbying organization and contacting their representatives. While tariffs make the commercial real estate sea turbulent, diligent observation and planning can help real estate professionals weather the storm.

Alex Rhoten is a principal broker at Coldwell Banker Commercial Mountain West Real Estate. www.cbcre.com (503) 587-4777