Not all tariffs on foreign goods have taken effect in the United States, but the uncertainty is already leaving its mark on demand for industrial property.
Warehouse owners say tenants are delaying decision-making on new leases as a result of the tariffs — both enacted and proposed — as they wait for a clearer picture on how potential price hikes from retailers will affect consumer demand.
Fluctuating decisions on trade policy and ensuing consumer uncertainty has prompted "tenants to take pause when they think about expansion of their space," said Carolyn Salzer, senior director and head of research at KBC Advisors, during a NAIOP industrial conference in Los Angeles this week.
On Wednesday, President Donald Trump said he plans to impose 25% tariffs on "all cars that are not made in the United States," adding to shifting trade moves that have coincided with sagging consumer confidence and stock market performance. Auto tariffs, expected to start April 2 along with other levies, are among trade measures intended to increase domestic manufacturing, but have spurred retaliatory tariffs from major U.S. trading partners such as Canada, Mexico and China.
The U.S. has placed blanket tariffs of about 20% — on top of a 10% tariff put in place during his first administration — on goods from China, as well as a 25% levy on goods from Canada and Mexico, save some exceptions.
The uncertainty is blamed for ripple effects across the global industrial market, with both tenants and owners pivoting their strategy to avoid the tariff fallout.
"It's very challenging for a business today to underwrite anything," Laura Clark, chief operating officer at Rexford Industrial, said during the NAIOP event. "We’ve seen requirements come into the market, and some of those parties have said, ‘Hey, I need 30 days to try to get more visibility.' This pattern will likely continue throughout the year.”
There are likely to be some winners, however, as manufacturers look to onshore their operations, creating new business for developers and landlords alike, some owners say.
Creating risk
On the tenant front, global industrial giant Prologis has seen customers pull back on space requirements, according to Darren Kenney, head of capital deployment for the firm's west region.
"In normal times coming out of China you have 10 cans from one of our largest customers," Kenney said during a panel at the NAIOP conference. "That same customer is now doing two or three. What that translates to is kind of a wait and see game on the investment side."
Even so, the uncertainty hasn't stopped Prologis from continuing to build its Canadian portfolio. The firm purchased its second property in the country last month in Vancouver, Kenney said.
Also in Canada, Capital Property Trust has sold a nearly 160,000-square-foot warehouse with plans to use the proceeds to in part fund an expansion into property types that "are less exposed to the impact" of U.S. tariffs, such as retail, apartments and smaller, multi-tenant warehouses.
For McKinney, Texas-based landlord Constellation Real Estate Partners, leasing effectively froze after the election at many of its Texas border properties as tenants decided to wait and see how tariffs shake out, according to managing partner Jeremy Giles. But pent-up demand will restart once the tariff dust settles, he predicted.
"Over the long term, the Mexico and U.S. relationship will be there,” Giles said. “So for now, that means slowing down the actual project, making sure it's designed, it's permitted, it's ready to go. As soon as [tenants] can get a little bit of clarity, they're ready to go.”
Winners and losers
While some industrial players are wading through current volatility, others — namely, manufacturers — are expanding to and within the U.S. to prepare for a potential high-tax import market.
Logistics and manufacturing demand could rise as manufacturers look to onshore their operations in regions throughout the country, Salzer said.
Large global companies are also not expected to be as affected by tariffs as regional players because of their scale, with smaller e-commerce users particularly at risk of the uncertainty, according to Charlotte Elstab, managing director at JLL.
The tariffs are slated to hit the automotive industry and the wood and steel-dependent housing and construction industries hard, but the effects won't trigger a recession because the U.S. economy is not dependent on imports, according to Christopher Thornberg, founding partner at Los Angeles-based research firm Beacon Economics.
“What’s more concerning is the potential for retaliation — that’s where things could get ugly. How far it goes is still unknown, and right now it’s just tit-for-tat threats. We really need to cool off this trade war," Thornberg said at the NAIOP event.