It’s expected to be a bumpy year in real estate. Tariffs have the potential to be a challenge in the near term, even though for industrial real estate, they could be beneficial long term. While that has implications for those looking to build, buy or lease, now is not the time to overreact.
“As it relates to your real estate strategy, stay the course,” says George J. Pofok, CCIM, SIOR, Principal at Cushman & Wakefield | CRESCO Real Estate.
George Pofok Jr, Research Analyst at Cushman & Wakefield | CRESCO Real Estate, adds, “This ultimately is going to be one of those small blips in the cycle for industrial.”
Smart Business spoke with the Pofok’s about the impact the threat of tariffs have on the Northeast Ohio industrial real estate market.
So far, how are the effects of the tariff news showing up in industrial real estate?
On the industrial side, the anticipated impact of the tariffs is projected to go a few different ways. There’s the potential for an influx of foreign investment into new manufacturing plants. While potentially only tangentially related, there have already this year been calls from companies based in Canada, Portugal, and Mexico inquiring about and putting offers in to buy and lease manufacturing buildings.
From an economic standpoint, there’s some expectation that the U.S. economy is going to slow a little bit as a result of this. That can have a ripple effect on global growth as the U.S. consumes roughly 31 percent of what the world produces.
Though construction costs had started to stabilize somewhat, the tariffs could lead to construction material cost increases of 5 to 7 percent this year. Further, the immigration restrictions could add additional pressure on labor costs. That, combined with the construction industry’s existing issue of an aging workforce, has further constrained an already narrowed talent pipeline in the sector. That could affect the speed with which projects get done.
There is an expectation that, at some point, there will be an effect on the supply chain, but that hasn’t yet shown up. There have been situations where a domestic producer is inundated with new order requests as other domestic companies look to add a U.S. supplier to offset any potential foreign supply chain disruption. However, there’s also the chance that such moves are delayed as domestic companies first look to create a buffer by stockpiling inventory before the tariffs are locked in.
While many in the industry — whether leasing, building or buying — are staying the course in spite of some turbulence as it relates to lease negotiations, there has been some push back as some use the tariff news as an excuse to re-trade.
What other factors are affecting the Northeast Ohio industrial real estate market?
The Northeast Ohio industrial market has a low vacancy rate of about 2.8 percent. That’s near historic lows. Some markets, in recent years, over-built, bringing new industrial real estate supply onto the market. Cleveland didn’t do that. Historically, 75 percent of industrial buildings are built to suit specific users, while the rest are speculative development. And though the area needs more space to be built, there hasn’t been much speculative construction coming online. That’s compressed the availability within the market.
It’s been an owner/landlord market for the past five years, which is a long time. So, if space were to come on to the market, whether for sale or lease, it would create upside potential and more of a healthy balance between owners/landlords and buyers/lessees. Events such as a significant change in the economic cycle can lead to such a shift.
But rather than try to time the market, it’s best to stay the course. The current turbulence in the economy will ultimately get sorted out relatively quick. This isn’t anything like the pandemic or Great Recession. The U.S. and world economies are stable, even though it feels like so much is up in the air right now. The best thing that a business owner can do is stick with whatever they planned to do prior to the tariff news based on their business trends. ●
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