Is Real Estate The Ultimate Safe Haven During A Bruising Trade War?

President Donald Trump

General opinion is that a trade war between the U.S. and China likely won't be a good thing for commercial real estate, but it might be one of the safer parts of the economy during that time.

Because of their relatively low dependence on global trade for their income, REITs have risen to new heights of popularity since President Donald Trump announced 25% tariffs on $200B worth of Chinese imports, the Wall Street Journal reports.

In the two days immediately after his announcement, REITs rose 0.9% in value while the S&P 500 fell 2.1%, the WSJ reports. Since the start of the year, the FTSE Nareit All Equity REITs index has risen 16.6%, outpacing the S&P 500 by 2.4%. The long-term nature of real estate investment when compared with other publicly traded companies only becomes more appealing as tensions between the U.S. and China seem unlikely to abate anytime soon, multiple analysts told the WSJ.

While global trade concerns may affect real estate less than other industries, REITs are more susceptible to rising interest rates, due to the high percentage of leverage they tend to use for transaction financing, according to the WSJ. The sector's poor performance for most of 2018 as the Federal Reserve raised long-term federal interest rates seemed to bear that out.

The Fed backing off from further hikes this year due to less certainty about the economy's long-term health improved the outlook for REITs relative to the rest of the stock market. But if the trade war is long and damaging enough to send the economy into a recession, then performing marginally better than everyone else will be cold comfort to commercial real estate.

Among the industries that look likely to be least affected by a downturn, multifamily, data centers and healthcare real estate rise to the top — along with REITs that specialize in those sectors, the WSJ reports. Sectors more directly tied with consumer confidence such as retail and hotels will likely be among the worst performers.

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