Commercial real estate shines amid U.S.-China tensions

As trade tensions between China and the U.S persist, real estate experts are analyzing the effects on the commercial real estate sector.

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“The short answer is, as far as we can tell, the impact is minimal,” said Chip McKinley, senior vice-president and portfolio manager with Cohen & Steers in New York, during a mid-September interview.

McKinley says the commercial real estate sector in Asia, particularly in China, has much more to lose than that of the U.S. because of the way the trade war is playing out.

Since the spring, U.S. and China have imposed tariffs on hundreds of billions of dollars’ worth of each other’s products, through back-and-forth retaliation.

As well, the Chinese yuan has devalued versus the U.S. dollar, while the Japanese yen has strengthened, McKinley said. That was making it harder to export goods to China.

Manufacturing and export orders in China fell last month, indicating that Chinese trade might be weakening, The Associated Press reported.

And, at the end of September, the World Trade Organization lowered its global trade growth forecast for 2018 to 3.9% from its 4.4% forecast in April, due mainly to various trade tensions. While that’s still robust, its 2019 forecast is even lower at 3.7%.

It’s important to consider, however, that China’s economy was already decelerating before the trade tensions began, said McKinley, whose firm manages the Renaissance Global Real Estate Fund.

“Even without trade tensions, [China’s] economy was going to slow, so that’s going to be a little bit deeper impact on property fundamentals,” McKinley said.

Yet, he’s still optimistic about Pan-Asian commercial real estate. The economy is still growing in China despite the slowdown, and Hong Kong, Japan and Australia—all regions where he monitors real estate—are experiencing healthy, nominal economic expansion.

McKinley points to the Tokyo office market as one that’s doing well despite global concerns. “What really surprises people is hearing that the Tokyo office market is one of the tightest […] in the world,” he said.

For the year ended July 1, Japan’s average land prices rose for the first time in 27 years, led by gains in commercial land prices, Reuters reported.

McKinley is also optimistic about Hong Kong’s commercial real estate sector. Tenants looking for large office or retail space aren’t slowing down despite current headwinds, which they see as temporary, McKinley said.

Even China’s slower growth is relative, going from “very fast growth to moderate growth,” McKinley said, which still provides “very good demand for tenants for all kind of commercial real estate space.”

Toronto’s commercial real estate

The commercial real estate market in Toronto is also one of the tightest in the world, McKinley said. With demand outstripping supply, the vacancy rate in the city is hitting record lows and was about 2.5% earlier this year.

Investment volume in Toronto’s commercial real estate was almost $5.7 billion in Q2, recent CBRE data show. That compares to $3.9 billion in Q1 and $4.3 billion a year earlier, and is the city’s highest-ever quarterly investment volume, Bloomberg reported.

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