13 December 2019

Executive Summary

  • The U.S. and China reached an agreement today on the substance of a “phase-one” trade deal that could avert additional U.S. tariffs—set to go into effect on December 15—on certain Chinese-made goods in exchange for increased U.S. agricultural purchases by China.
  • President Trump announced that negotiations on phase-two of the trade deal involving further easing of tariffs and related issues would begin immediately, rather than waiting until after the 2020 U.S. presidential election.
  • Tariffs have accelerated shifts in supply chains, with slower growth in container volume to the U.S. from China and increased growth in volume from other countries.
  • Although trade tensions were lessened today, residual uncertainty may cause retailers and manufacturers to continue re-examining their supply chains and logistics footprints, impacting U.S. industrial markets.

China announced today that is has agreed to the substance of a phase-one trade deal with the U.S. that would halt the imposition of additional tariffs on Chinese-made goods set to take effect on December 15 and roll back existing tariffs on some Chinese products. In return, China is expected to purchase more U.S. agricultural products, protect U.S. intellectual-property rights and widen access to China’s financial-services sector.

Agreement on the substance of a phase-one deal comes at a time when the effects of shifting supply chains and production lines are impacting industrial property markets in the U.S. Some of these shifts are being driven by broader factors other than tariffs.

Tariffs Have Accelerated Restructuring of Supply Chains

While China has been a primary source of imported goods to the U.S. for the past 30 years, there has been a long-run shift to other source countries due to rising production costs in China. For years, the production of apparel, shoes, toys and simple electronics has been shifting from China to Southeast Asian, South Asian, Latin American and African countries. But the U.S-China trade conflict has accelerated this trend.

China-to-U.S. container volume growth slowed to 4% from mid-2018 to mid-2019, after averaging 5% since 2012. By comparison, imports from Southeast Asia increased by 13% over the past 12 months after averaging annual growth of 8% over the previous six years.1 For example, Vietnam-to-U.S. imports grew by 36.7% in the first six months of 2019 compared with the same period last year.2 Import volume from Latin America and East Africa also is growing.

Figure 1: Import Volume Growth to U.S. by Source Country

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Source: PIERS, 2019.

Some examples of companies diversifying production outside of China include Samsung to Southeast Asia; Hasbro to the U.S. and India; Whirlpool to the U.S.; and GoPro to Mexico. Fashion brand PVH is shifting more sourcing to South Asia, Southeast Asia and Africa. Some of these companies have been diversifying their manufacturing operations for some time (Hasbro, for example); however, recently levied tariffs accelerated their moves.

Short-term CRE Impacts

A CBRE analysis shows that the Inland Empire and New Jersey were most impacted by importers increasing their demand before certain tariffs took effect, driving elevated warehouse absorption levels in those markets. The ports of Los Angeles and Long Beach account for close to 40% of all Chinese imports to the U.S., and the Port of New York & New Jersey accounts for approximately 30%. Thus, these markets are most susceptible to structural supply chain shifts resulting from the U.S.-China trade conflict.

3PL operators stand to benefit from trade uncertainty and supply chain restructuring. When companies are unsure about where to locate their operations and require a layer of flexibility, they outsource. In terms of square footage, 3PLs have grown by approximately 31% between 2015 and 2018. 3PLs are particularly prevalent in major markets like Los Angeles and Inland Empire, where logistics flexibility has become increasingly important (see recent CBRE report here).

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Long-term CRE Impacts

As supply chains diversify from China, new U.S. domestic distribution models and logistics footprints will emerge, requiring retailers and manufacturers to have distribution centers in more locations. Although not the only regions, the East and Gulf coasts have been capturing a larger share of imports from Asia, rising to 36% from 28% over the past decade. This trend may accelerate as diversification of production lines translates into heightened demand for distribution space in these regions.

Figure 3: Share of Loaded Container Volume from Asia by U.S. Coastline

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Source: PIERS, 2019.

1 Southeast Asia includes Vietnam, Philippines, Indonesia, Thailand, Singapore, Malaysia, Cambodia, Myanmar (Burma), Laos, Brunei and Timor-Leste.
2 Sea-Intelligence and Journal of Commerce, November 2019.

CBRE and the South Carolina Ports Authority teamed up to analyze trade data and forecast potential impacts of tariffs on supply chains and real estate portfolios. With CBRE’s empirical and anecdotal view of the industrial real estate sector, and SCPA’s data and view of global supply chains, this report links supply chain change with industrial real estate impacts taking into consideration long cycle global sourcing shifts paired with immediate tariff impacts.

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