Long Real Estate Cycle Could Last Another Year, But Tariffs Remain Significant Headwind

The U.S. real estate cycle could last another year, but the healthy market may stub its toe if tariff wars with China escalate. 

The U.S. economy grew at an annual rate of 3.1% in Q1 and 2.1% in the second quarter.

It is expected to slow in the second half of 2019 as fiscal stimulus and froth from tax cuts fade, Nuveen Real Estate said in its Think U.S. Cities Trends and Tactics Q3-2019 Outlook.

The company forecasts U.S. economic growth between 2.6% to 2.9% in 2019. Growth in this ballpark would create enough demand and stimulus for commercial real estate to keep the current cycle going for another year or two. 

But the ease of the second half of 2019 and Nuveen’s optimism about the future hinges on whether the U.S.-China tariff conflict escalates or cools off in coming months. 

“More tariffs are unambiguously negative for all types of real estate,”  Nuveen Real Estate Head of Research, Americas Melissa Reagen said. “First, the tariffs will hurt economic growth, which will hurt demand for all types of real estate.”

She believes retail and warehouses would be hit first and the hardest. Tariffs will increase retailers’ costs, which Reagen said would hurt their profit margins and could accelerate store closures.

The West Coast industrial market in particular could face a sudden economic shift if the trade war escalates, though it won’t happen as a knee-jerk reaction. 

“Businesses will not reroute their supply chains until they believe the tariffs are staying in place for the long term,” Reagen told Bisnow. “Should importers start to reroute their supply chains away from Asia towards South America or Europe, West Coast warehouses could experience much less demand.”

Other property types would feel trickle-down pain.

“From an office perspective, companies that rely on profits from abroad will likely suffer as their costs rise from having to get goods manufactured at higher costs.”

Even the multifamily segment could witness a negative shift in demand if tariffs cause a downturn. If tariffs make goods more expensive, consumers will have less money to spend on rent, and landlords would have difficulty raising apartment rents.

But Reagen said even if a downturn occurs, real estate fundamentals don't point to a doomsday type of scenario for commercial real estate. For one, the Federal Reserve is sitting on the sidelines ready to adjust interest rates to foster economic growth. 

“As long as the economy grows, the real estate cycle will continue,” Reagen said. “Real estate fundamentals remain solid, which likely means that when a downturn does occur, it should be a rather soft landing for real estate.”

Retail Brick-And-Mortar Stores Remain Stronger Than People Think 

Even though retail assets face a great deal of scrutiny due to recent bankruptcy announcements and store closings, the sector overall is healthier than many think, Nuveen said. 

In-store retail sales accounted for 90% of total retail spending in May, the Nuveen report said. Data cited by Nuveen from the Green Street Commercial Property Price Index also shows retail prices now correcting.

“The gap between data-driven retailers and non-data-driven will only grow wider as will the physical retail real estate that houses these retailers,” Reagen predicts.

“Retail is in the midst of a repricing cycle which could create buying opportunities but this all depends upon how long the repricing cycle continues.”