As of early July, the tariff shoot-out between President Trump and several of our major trading partners had not yet had a significant impact on warehousing – but that could change soon.
“To date, threatened sanctions have been small, and logistics real estate remains insulated,” the international industrial real estate firm Prologis said in a July 9 report.
“Much of the industry’s growth in the last decade has been driven by ecommerce, supply chain modernization and economic expansion,” the company notes.
But Prologis warns that an escalation of protectionist trade policies increases the potential of seeing a deep global economic downturn, which would have a negative impact on users of logistics real estate.
Most tariffs announced by the Administration up to this point pose a risk to the production end of supply chains, potentially decreasing demand for goods or acting as motivation for manufacturers to search for ways to cut costs, the company says.
In contrast, logistics real estate is positioned at the consumption end of the supply chain, Prologis points out. Regional and city distribution focus on proximity to major population and consumption centers to speed delivery.
Trade exposure is concentrated in a handful of markets, which are also important consumption centers. Port markets have the biggest exposure to global trade; however, import centers are still only a fraction of total occupied space in these markets.
Among Prologis’ U.S. markets, Southern California and New Jersey have the highest proportion of space used as import centers, each at 25% or less.
The company says major intermodal markets also have links to global trade – specifically Chicago and, to a lesser extent, Dallas – because most imported containers move immediately out of a port on a combination of rail and truck without pausing at a local logistics facility.
While positioned along global trade routes, these markets are are also major consumption centers, with a combined population of nearly 60 million, the company stresses As a result, most industrial space serves local and regional consumption.
While not denying the impact on logistics service providers like truckers, railroads and third-party logistics warehouses, “trade policies as currently announced do not seem to pose a substantial threat to the logistics real estate expansion,” Prologis says.
“Announced trade policies remain small relative to total trade relations, consumption and the overall economy. The $50 billion in tariffs on Chinese imports planned amount to less than 10% of trade from China and representing less than 0.5% of the U.S. economy.”
“These tariffs are focused on manufacturing-oriented users and not on the primary customers of logistics real estate and pose little risk to U.S. consumers.” Others disagree (see next article).
NAFTA negotiations have yet to result in any new policies. “Logistics real estate markets in both Canada and Mexico have recorded healthy demand and low vacancies despite the uncertainty surrounding trade,” Prologis remarked.
“Mexico City, for example, has one of the lowest vacancy rates in the world after years of solid demand growth.”
So far, tariffs have only paused or slowed trade growth, not halted it, Prologis points out.
“Demand for trade-related logistics real estate should continue, even as the U.S. negotiates trade on a bilateral basis. Trade and imports could potentially shift from one production market to another, requiring similar logistics real estate to distribute to end-consumers.”
That doesn’t mean tariff prospects don’t threaten the future of the current strong economic growth, Prologis admits.
“A material escalation of protectionist trade policies poses a threat to the economic expansion and, therefore, to logistics real estate demand. Tariffs are a tax on consumption and place upward pressure on prices and inflation.”
While logistics real estate demand is buoyed by the structural shift toward ecommerce sales and reconfiguring supply chains for higher service levels, demand is ultimately built on a foundation of consumption, Prologis said.
“Lower consumption, lower business confidence and rising uncertainty could produce an economic slowdown or spark a recession that could impact a broad range of U.S. businesses, including users of logistics real estate.”