Tracking Tariff Costs And Consequences Becoming A Full-Time Job

CRE tariff chatter has centered around the toll on developers, but their fallout is being felt across all sectors of the industry. Now, predicting and mitigating unpredictable financial hits amid shifting policy has become a new full-time role for some. 

The Trump administration’s tariff policy has created a new question for retail landlords, for one: Where do their tenants’ supply chains originate? As of now, those that get goods from China may run into problems with the 55% surcharge the U.S. has imposed on that country.

“That's a question nobody used to ask, and now, all of a sudden, everybody's going to have to ask that question,” The Counselors of Real Estate Global Chair John Hentschel said Wednesday at the National Association of Real Estate Editors’ 59th annual conference in New Orleans. “[The answer] may influence their ability to pay rent, and that may require concessions and abatements and increased vacancy, which creates a higher risk.”

Tariffs on most U.S. imports have made future costs less predictable for items across the board, creating paralysis for many projects, Hentschel said. Yet decisions still have to be made, forcing companies to project for alternate possibilities and use probability to determine which route to take. 

“It becomes a simple math equation … because we don't have a crystal ball and we can't see the future,” Hentschel said. “The longer the uncertainty persists, the more risk there is. And if there's more risk, there should be an additional premium or return.”

A tariff tax hasn't yet shown up in many prices, even on the construction side, Scotland Wright Associates CEO Michael Tucker said. 

“It's not had dramatic price increases on things that are actively in play,” Tucker said. “But the uncertainty of both tariffs now and in the future has caused a lot of our clients to mitigate their best guesses of where tariffs are going to be and how it's going to impact their supply chains and costs.”

That can turn into a full-time job. Tucker said he has a housing supply manufacturer client that reassigned its acting chief financial officer to be the company's full-time tariff expert. 

“They're having to insource all the complexity of all the parts that they're buying to do some of their manufacturing in the U.S. … and build giant spreadsheets to figure out what's going to happen,” Tucker said.

Even with the best commercial real estate minds focused on tariffs, it can be hard for companies to feel secure in taking solid actions. That is partly because they are dealing with real estate, which Hentschel called a durable but very expensive asset.

“You can't turn around on a dime when you're spending hundreds of millions of dollars,” Hentschel said. “There's more to a decision than just tariffs.”

Determinations need to be based on an examination of market fundamentals and what the asset is going to do in the long term, he said.

“You can't look at tariffs in isolation, because tariffs are just one piece of the puzzle,” Hentschel said. “It's like a balloon — push one side of the balloon and the other side comes out.”

Due to the uncertainty around tariffs and the presidential election before that, a large amount of dry powder has accumulated on the sidelines as people wait for opportunistic investments.

“There are massive opportunities that have to do with ‘What's the influence on inflation? What's the influence on interest rates? What's the Federal Reserve going to do?’” Hentschel said. “These are all responses to the tariffs.”

It is important that the U.S. and real estate players find an equilibrium with regard to tariffs to counteract the turmoil, CBRE Senior Managing Director Seth Martindale said. 

“The best scenario is we put the U.S. in the most advantageous position possible, where we've moved some of the manufacturing capacity that we probably should have had back in the U.S. anyway,” Martindale said.

Hentschel said the market will find that equilibrium. But he pointed out that there will be winners and losers along the way.

“The question we all have to answer is, how long is that going to take and what are going to be the intermediate effects?” Hentschel said. “The people who can figure that out are the ones who are going to be the winners, and the people who don't are the ones who are going to be the losers.”