The tariff dilemma: Long-term opportunity in the industrial sector

Preview

Since President Trump announced a range of global tariffs on April 2, we have been receiving a growing number of questions from investors regarding the impact these tariffs might have on the US industrial sector, and on commercial real estate generally. Understandably, there is a concern among investors that industrial assets might bear the brunt of the tariff impact, given the sector's status as the primary point for goods entering and leaving the United States.

In our assessment, however, the industrial sector is not disproportionately exposed to the cascading effects of tariffs. While a recession is a possibility, we are cautiously optimistic that the United States can avoid one. Should a recession occur, most industries and sectors, as has happened in the past, will be affected to varying degrees. Interestingly, the industrial sector might be better positioned to weather a downturn due to several factors:

• There is currently a sharp decline in supply deliveries and new supply starts which are expected to worsen due to potentially rising construction costs, including steel, lumber, and labor.
• Higher replacement costs could have other significant implications on market fundamentals, including faster growth of industrial rents.
• Structural demand from e-commerce continues to grow, capturing an increasing share of both business-to-consumer (B2C) and business-to-business (B2B) sales.

However, it’s important to note that these factors do not render the industrial sector immune to a typical demand-driven downturn. With tariffs potentially acting as a catalyst for a downturn, we believe that most real estate sectors, including industrial, are at risk if consumption turns negative. Nevertheless, the positive tailwinds mentioned earlier may better position the industrial sector in the event of a downturn.

The trade conflict between the United States and the rest of the world escalated faster and more broadly than most anticipated. “Liberation day” tariffs announced in early April sent shockwaves through the stock market and softened what otherwise seemed like improving business sentiment in the second half of 2024. The implemented and additional proposed tariff rates have already been modified several times, and their motivation appears to vary across several factors. So far, tensions with the European Union, Mexico, and Canada remain relatively calm, (though not so with China), and a 90-day pause on most “reciprocal” tariffs may have eased some market anxiety.

A prevalent argument is that a significant escalation of tariffs stands to have a meaningful effect on the global economy after 80 years of post-World War II broad globalization. The trade and economic consequences of going from a 2.5% effective tariff rate to approximately 25% are potentially significant to the downside, but the fluid shape of future negotiations make any quantitative estimate highly speculative. For commercial real estate investors, tariffs have the potential to directly impact at least one of the property types that has become one engine of modern economies – logistics and warehouses. It is quite possible businesses will slow capital decisions until there is better clarity on policy, and consumer purchasing power could suffer if elevated tariffs stick for long.

In this paper, we suggest investors take a holistic view of the industrial sector, separating cyclical from structural demand drivers, to assess long-term investment rationale. Empirical evidence of living with past tariffs (since the first Trump administration, albeit narrower and smaller in scope) and the resulting impact thereof on this sector can also be helpful in assessing how to navigate the future.