How tariffs may stunt construction & leasing

U.S. tariffs have impacted price points on hundreds of construction materials and finished goods in the office and building amenity areas, including furniture, flooring, wallcovering, textiles and lighting components. Even consumer electronics may be affected if scheduled tariffs are imposed in mid-December. Courtesy Kieding

Kim Hoff
Design director, Kieding

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Regardless of political leanings, American companies are girding for a rough ride if the tariff situation bleeds into the new year. After some 17 months, the Trump administration’s cat-and-mouse trade war with China shows few signs of resolution before another round of tariffs was scheduled to take effect Dec. 15. Many believe it still is too early to measure the wider impact on the economy. Others have been profoundly affected already. What seems to be clear is that a primary driver of pricing volatility just may be uncertainty itself. This most surely applies to the office building market and the design and construction industry that supports it.

“Even the threat of the tariff effect has made people very jumpy,” said Mark Stratton, president of Denver-based Coda Construction, a commercial tenant finish firm. “Obviously, nobody knows what’s going to happen in the near future, but people have to protect their interests. It’s just too volatile not to.”

The tariff story in practical application began last March when the U.S. imposed global duties on aluminum and steel with President Donald Trump stating that the move was intended to protect the country’s economic and security interests. Quickly thereafter, Trump offered some relief to a number of targeted nations, but China was not one of them. More tariffs since that time have impacted price points on hundreds of construction materials as well as mechanical, electrical and plumbing components, floor and wall panels, textiles, cabinetry, tiles, glass blocks – the essentials that drive the construction industry, office design and, by extension, commercial real estate.

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So, what’s left to tax? We may have learned the answer after Dec. 15 when the U.S. is scheduled to levy 15% tariffs on some $156 billion of additional Chinese products, which, economists point out, constitute nearly the entire balance of goods imported from that nation. And as big a dent as these tariffs have already made, it’s not always about the products themselves.

“This was already a supply and demand issue well before the tariffs,” Stratton said. “Construction costs have gone up here at least 50% over the last five years.”

Additionally, some subcontractors, already wary of price volatility have pushed back with additional measures to minimize market exposure. “A plumber, for example, is already strained with standard increases, which the tariffs only aggravate,” Stratton said. “So that plumber may not hold his (price) quotes for any specified period like he did in the past.”

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That’s just one example of increased instability at the procurement point, but clearly it illustrates the hundreds of potential pitfalls along the supply chain on which any given project may depend. To put a finer point on it, any stateside company that outsources its manufacturing to China at this time will feel some kind of pinch.

“From almost every manufacturer producing product domestically or oversees, we have seen a 3% to 8% price increase that is attributable to the tariffs,” said Brooke Wolfe, principal of Merchants, a Denver commercial furniture company. Wolfe maintains that some manufacturers absorb a portion of increased prices. “If their prices go up, that’s what we’re basing our prices on.”

Even office furniture manufacturer Steelcase raised prices twice in four months this year, according to Curbed, a real estate and design blog. If the market continues to destabilize, some smaller outfits with leaner margins and tighter inventories will almost certainly have to gamble with customer relationships by hiking costs at least once. Some will have to walk away from projects, or worse.

“We have not seen a noticeable slowdown and that could be because Denver is insulated with the growth that we have here,” Wolfe said. “We haven’t seen anybody turn away. We haven’t seen a change in demand. But are we nervous? Yes.”

That kind of concern already has caused a ripple effect across the interior design industry, according to the American Society of Interior Designers. A late-August survey of U.S. design firms revealed that 66% were affected by tariffs compared to only 15% in 2018. As for the remainder of this year, 30% expect to see “zero or negative sales growth.”

While those numbers may not signal impending doom, the creeping uncertainty again may be enough for some design firms to reevaluate their profit factor as new projects begin to fill next year’s pipeline.

As anxious as many in the industry appear to be, there are those who believe the tariffs are just the right tonic for this already robust economy. After all, Trump’s base reasoning is to further stimulate the American economy by forcing up the cost of imported goods.

In a recent issue of trade magazine Furniture Today, Steve Rotman of East Coast Rotman’s furniture and flooring put it this way: “I’m actually in favor of the tariffs. I think it’s going to force this issue where the United States is going to become much more competitive in terms of being able to produce product, at least for our own consumption.”

What American company could disagree with that sentiment? Why can’t the U.S. reduce its reliance on Chinese goods in much the way it has been moving toward energy independence? It’s a straightforward concept, but in practice, not so much.

Most U.S. companies that feed the design and construction machine cannot simply turn on a dime and buy American goods across the board or they’d likely be doing it already. It takes time and money to vet new manufacturers and vendors. Quality standards must meet or exceed that of Chinese factories if those products and processes can even be found in this country. Lead times cannot be significantly compromised, if at all. Finally, on balance, American products for this industry just cost more.

“Material costs affect everyone in the process,” said Matt Pavlakovich, president-elect of Denver Metro Building Owners & Managers Association. BOMA is a nonprofit trade association representing owners and managers of commercial office and other commercial buildings, according to the organization’s website.

Pavlakovich maintains that neither BOMA International nor Denver Metro BOMA have yet to weigh in on the tariffs. It may be just too premature for that. But landlords and property managers are well aware of the dangers.

“A $50 per square foot turnkey TI (tenant improvement) can turn into $55 or $57 in a flash, and that kind of increment is significant,” he said. “It’s a cascading effect. Costs aren’t going to come down, and it affects the economics of the deal. When the economics don’t make sense, fewer deals get done and leasing trends downward.”

Editor’s note: This issue went to press Dec. 11, before the Dec. 15 scheduled round of tariffs went into effect.

Featured in CREJ’s December 2019 Office Properties Quarterly

Edited by the Colorado Real Estate Journal staff.