Financial uncertainty has been spilling across commercial real estate. Economists’ estimates that a recession is on its way have been adjusting upward to as high as a 65% chance, as of last week. CRE loan spreads have been widening as tariffs have driven lenders to tighten credit. Even Blackstone said tariffs are affecting CRE investment.
In a video, Marcus & Millichap senior vice president of research services John Chang addressed the firm’s position that “unpredictable trade policies sustain elevated recession and inflation risk.”
The last few weeks, tariffs have become an on-and-off-and-on series of market shocks, with a 90-day reprieve for all but China. The 10-year Treasury fell from about 4.01% on April 4th to below 4% on April 4th and closed on Tuesday, April 22, at 4.41%.
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“So, while it looks like the global trade war has tempered somewhat, I do want to point out that the average effective tariff rate consumers face is now 27%, the highest since 1903,” Chang said. It was 2.5% a month or two ago.
Beyond the average, tariffs on China have jumped from 20% to 54% to 104% to 125% and, just a week ago, 145%, he noted. Tariffs on autos, steel, and aluminum are 25%. Canadian software lumber, critical for building construction, faces 34% tariffs after a previous high of 14% was set last summer.
“I think the policies could change with little notice at any time this year,” said Chang. “They’re probably going to be very fluid, which suggests that businesses, consumers, investors, and pretty much everyone around the world will be dealing with elevated uncertainty for a prolonged period. And making decisions is much more difficult when uncertainty is elevated.”
Equity markets have seen the largest roller coaster rides. Bond markets have also seen roiling, and both have seen falling prices simultaneously, an unusual situation. Historically, the two have moved inversely, with investors moving to stocks when the opportunities are good, and prices rise and returning to bonds during uncertainty.
Chang argued that real estate, which will still face headwinds in 2025, still offers “relatively low volatility,” “recession resistance,” and “some level of inflation resistance.”
“Based on our preliminary look at first quarter data, it appears that apartment vacancy rates fell by about 10 basis points in the first quarter, despite still elevated completions,” he said. “It looks like office vacancy rates also declined by about 10 basis points. Retail vacancy rates looked like they held firm, while industrial vacancy rates may have risen by about 10 basis points. Retail vacancy rates looked like they held firm, while industrial vacancy rates may have risen by about 10 basis points.”
Additionally, there is still a good chance that many of the provisions of the Tax Cuts and Jobs Act of 2017 might still be extended. “So, in this climate of uncertainty and volatility, commercial real estate may emerge as the favorite investment option, especially for investors who keep their eyes on the horizon,” Chang said.
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