January 16, 2020

Executive Summary

  • U.S. and China signed a partial agreement yesterday that should de-escalate current trade tensions.
  • The deal includes China purchasing an additional $200 billion in U.S. goods and services over the next two years on top of a baseline $186 billion it bought in 2017. The breakdown is $77.7 billion in manufactured goods, $32 billion in agricultural goods, $52.4 billion in energy products and $37.9 billion in services.
  • While the deal also canceled planned U.S. tariffs on certain Chinese goods like cellphones and computers and reduced tariffs to 7.5% on $120 billion of Chinese goods like flat-screen TVs, it left 25% tariffs in place on $250 billion in Chinese industrial goods and Chinese retaliatory tariffs on more than $100 billion in U.S. goods.
  • The deal also addressed intellectual property protections, U.S. financial services industry access to China, business disputes, Chinese currency manipulation and the trade balance between the two countries.
  • The most notable commercial real estate impacts will come from stronger economic activity in 2020.
  • All three primary commercial sectors—office, industrial and retail—will benefit from the agreement.

Impact on Business

The most notable short-term impact from the agreement will be a lessening of uncertainty. Business sentiment deteriorated quickly as the trade dispute escalated—leading to declines in investment, which weighed on economic growth. Additionally, anticipated purchases will support property market demand as businesses become less cautious and Chinese purchases begin to boost exports.

Upgraded Outlook

As a result of this decrease in trade tensions between the world’s two largest economies, CBRE upgraded its outlook for 2020. During the year, we expect U.S. growth to be near its long-term potential of 2%. While this does represent a slight cooling from 2019, it is a respectable level at a mature point in the economic cycle.

Figure 1: U.S. Economic Outlook - CBRE House View (% Changes)

TW 011620-F1

Source: CBRE Research, January 2020.

Impact on Commercial Real Estate

Increased demand as a result of the agreement will support property market fundamentals in 2020 but will vary by market and property type.

  • Industrial
    Industrial markets where trade with China accounts for a substantial amount of demand, such as the Inland Empire and Northern New Jersey (among others), will remain healthy. Increased Chinese demand for agriculture and manufactured goods—including machinery, electrical equipment, pharmaceuticals, aircraft, vehicles, medical instruments, raw minerals and other goods—will boost industrial demand.
  • Office
    Some office markets will have residual benefits from industrial-oriented companies profiting from the deal. Direct benefits for the office sector include demand increases for various services, including travel, financial services, charges for use of intellectual property (software, AV-related products, etc.) and others. This will particularly benefit markets where tech and financial services are major demand drivers.
  • Retail
    U.S. consumers will benefit as additional tariffs on a wide-range of consumer goods such as computers and TVs were put on hold indefinitely. Additionally, tariff reductions and a stronger economic outlook will further support an already strong U.S. consumer.

Bottom Line

The U.S. and China took a major step to mitigate current and future impacts of the trade conflict. The agreement addressed many disputes in the trade relationship, but not all. As a result, tensions will not completely go away, but adverse impacts in 2020 have been minimized.

Effects from the deal will vary across markets and property types, but CBRE does not believe that the deal will dramatically alter commercial real estate market dynamics on a broad level. An upgraded U.S. economic outlook for 2% growth should bode well for commercial real estate in 2020.

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