The trade dispute with China is affecting everything from the stock market to mortgage applications and consumer sentiment. Uncertainty is tough to navigate, and the situation between the two global powers is anything but certain.
There are even implications for the multifamily housing market—or are there?
There are warning signs that investors are getting nervous about putting their money in capital-intensive projects that involve hardhats and shovels rather than code or arbitrage, writes William Freedman for Sharestates. One reason, according to American Institute of Architects chief economist Kermit Baker, is the ongoing volatility in the trade situation.
“The People’s Republic is in the middle of a massive expansion of its economic clout, a program known as the Belt and Road Initiative. As part of that effort — and in part as a hedge against the devalued yuan — Chinese investors poured scores of billions of dollars into American real estate over the course of 2015-2016,” Freedman writes. “According to private lender Jeff Levin, all-new Chinese direct investment in the sector evaporated in an instant.”
Levin wrote that Trump’s stance “alarmed” China’s central bank, which subsequently stopped all international capital outflows. So while the news continues to report on ongoing talks between the two countries, the fact remains that Chinese investors have pulled out of their ventures in the U.S. In the first half of 2018 alone, Chinese investment in the U.S. plunged 90%, and Chinese real estate website Juwai.com estimates that home sales to Chinese buyers will fall to between $10 and $12 billion in the year ending March 2020, compared to $13.4 billion reported for the year ending March 2019.
The impact on the multifamily market
The most immediate impact of a trade war on multifamily real estate is that the prices of steel, aluminum, and other construction materials will continue to rise for the foreseeable future. Yes, tariffs punish Chinese companies by making their intermediate goods more expensive, but it’s also true that they punish American end-consumers who ultimately pay that higher price.
“The good news there is that the impact might not be nearly as bad as one might think,” Freedman writes. “According to the National Association of Homebuilders, tariffs should increase the average multifamily unit cost by only $478. That is a lot less than the new costs added to the building of a single-family home, which could head upwards of $6,000 due to a new levy on Canadian lumber.
Even so, the availability of materials could become a much bigger issue than the price. As supply routes are disrupted, the effects ripple along the chain. Builders are already seeing some delays, which could add months to the typical two-year timeline for a multi-tenant building. During that time, Freedman adds, contractors still need to be paid and it increases the chances of the economic climate changing even further, which could possibly endanger the project in the event of a recession.
Lower mortgage costs, however, could add a counterweight to balance the higher expenses of materials and time. If that scenario plays out, investors can happily ride the multifamily bandwagon as far as it can go, as they “tend to be indifferent” as to whether or not the units are rented by individuals or sold as condo units.
And yet, there’s one aspect of the mortgage market that makes this line of inquiry a little murky.
“A substantial number of American mortgages have recourse to such federally chartered programs as Fannie Mae or Freddie Mac. To ensure liquidity in these markets, these entities issue bonds. These bonds are bought up by investors, domestic and foreign. China is a huge player in this market,” Freedman writes.
As long as the current Sino-American tensions stay focused on trade, the U.S. multifamily market should be effected very little. If the situation turns into an all-out economic war, however, and notes get called in as direct investment dries up, then real estate might not be the safe haven it appears to be at the moment.
Sharestates is an online marketplace lending and investing platform. To access investors, investors or borrowers can create an account and present their project for review. Using a 34-point underwriting process, the project will be vetted to see if it meets investor expectations, and can be funded from more than one source.