President Donald Trump accelerated a global trade war this week in a move that's expected to dramatically disrupt the U.S. retail industry, a major user of commercial real estate.
Wall Street overall didn't react well to the "Liberation Day" news that Trump announced Wednesday. The stock market plunged, with the Dow Jones Industrial Average dropping Thursday nearly 1,700 points. It was no secret that the president was going to increase the tariffs he imposed on China and Canada in February, but the scope of the new round and their size — and immediacy of their impact — left some in the retail industry surprised and two industry trade groups spoke out against the new policy.
In a live earnings call Wednesday, the CEO of furniture retailer RH, formerly Restoration Hardware, uttered an expletive when he saw how his chain's stock tumbled after Trump's announcement. RH's shares were down about 40% end-of-day Thursday, the top loser among U.S. stocks. Also among the day's worst performing stocks were VF Corp., the footwear maker behind such brands as Vans and Timberland, as well as home furnishings retailer Wayfair and apparel firm Gap.
Real estate industry professionals say it's early to gauge how Trump's tariffs, aimed at keeping manufacturing in the United States, will pan out for retailers, their landlords and warehouse operators. At least one Wall Street analyst expects the president to reduce the announced tariffs, starting out high as a negotiating ploy.
The uncertainty comes as retail real estate demand is relatively strong, making it better able to withstand any lulls in leasing that might result than at other times; industrial property owners have already said tariffs are causing some tenants to express concern about taking more warehouse space. The U.S. retail space market, with about 12.2 billion square feet, remains close to its historic low at just 4.2%, according to CoStar data.
In fourth-quarter earnings reports, some retailers said they had reduced their dependence on goods from China in preparation — now only to see high tariffs imposed on Vietnam, one of their new sources for goods. Others said they had dealt with tariffs before and knew how to navigate them. Some chains conceded they would be forced to have shoppers bear the brunt of the tariffs.
"Ultimately, retailers will have to determine how much of the additional costs they can absorb versus pass on to consumers," Brandon Svec, national director of U.S. retail analytics for CoStar Group, said in an email Thursday. "It becomes a choice between lower margins or lower sales, with most likely choosing a mix of both."
Sales slowdown
The National Retail Federation and the U.S. Fashion Industry Association immediately voiced their opposition to the new round of tariffs. In fact, the NRF announced Wednesday it expects the growth of U.S. retail sales to slow down this year, to 2.7% and 3.7% over 2024 to between $5.42 trillion and $5.48 trillion, because of inflation and consumers’ anxiety over tariffs. The NRF added that tariffs will disproportionately impact small retailers.
“Tariffs are a tax paid by the U.S. importer that will be passed along to the end consumer. Tariffs will not be paid by foreign countries or suppliers." David French, NRF executive vice president of government relations, said in a statement.
The U.S. Fashion Industry Association represents textile and apparel brands, retailers, importers and wholesalers based in the United States that do business globally. The new tariffs will disproportionately impact the textile and apparel industries, which have "been paying higher tariffs for decades with little impact on reshoring manufacturing," the trade organization said in a statement.
ICSC, the trade group that represents retail landlords, declined to comment on the new proposed tariffs.
Neil Saunders, a retail analyst and managing director at analytics firm GlobalData, in an email to CoStar News said he was taken off guard by some of the proposed tariff rates.
"The impact is hugely disruptive," Saunders said. "The tariffs come as no surprise, everyone knew they were in the offing. However, the comprehensiveness of the new tariff regime is more shocking, as are some of the tariff rates. Basically, there is no escape from tariffs. Every company that imports is going to have to deal with higher costs that result from this new way of conducting trade."
In a report this week, UBS Research said Trump is probably using tariffs as "bargaining chips … likely to be toned down." Until and unless that happens, retailers will be challenged, according to Svec.
"The magnitude of the impact depends on how long these new rates remain in place (and certainly differs greatly by sector and retailer)," he said.
Preparations made
Retailers have been taking steps since November to minimize the impact of tariffs, such as "pressuring suppliers to offset the costs with lower prices and increasing inventory on hand ahead of the announcements," according to Svec.
For example, in March, Macy's CEO Tony Spring told Wall Street analysts the retailer was ready for tariffs.
"Our outlook tries to take into account the pieces that we know and the things that we don’t know," he said on an earnings call. "Our first-quarter inventories are in good shape. There’ll be no impact from the pending tariffs. As we look at the remainder of the year, we’re taking a case-by-case basis and trying to react in real time as we learn more."
Earlier this year, Target Chief Commercial Officer Rick Gomez told Wall Street the discounter was importing fewer goods from China in the face of tariffs.
"In terms of our owned brand production, we've reduced what we source from China from roughly 60% in 2017 to around 30% today and on our way to less than 25% by the end of next year, a goal we expect to achieve four years ahead of our schedule," Gomez said.
But these kinds of measures "will not be able to fully insulate earnings," according to Svec. "Put simply, the outlook for retail space demand has become more bearish because of higher tariffs."
Price hikes ‘likely’
The apparel industry isn't the only retail sector expected to be hit hard by tariffs. Consumer electronics sellers such as Best Buy are, too.
"International trade is critically important to our business and industry," Corie Barry, the chain's CEO, said during a March earnings call.
She added that "the consumer electronics supply chain is highly global, technical and complex. China and Mexico remain the No. 1 and No. 2 sources for products we sell respectively. While Best Buy only directly imports 2% to 3% of our overall assortment, we expect our vendors across our entire assortment will pass along some level of tariff costs to retailers, making price increases for American consumers highly likely."
And on his earnings call this week, RH CEO Gary Friedman warned that "anybody of scale in the home [furnishing] business has a high percentage of their content coming out of Asia."
In February, Walmart Chief Financial Officer John David Rainey told CNBC that roughly two-thirds of what the discount giant sells comes from or is put together in the United States. He also warned that Walmart would not be "completely immune" to tariffs on imports from Mexico and Canada.
“We’ve lived in a tariff environment for the last seven or eight years, and we’ll do what we know how to do,” he said. “We’ll work with suppliers. We’ll lean into our private brand. We’ll shift supply where necessary to try to take advantage of lower costs that we can then pass on to consumers.”
Updated April 3 to correct the spelling of Corie Barry.