Tariff Fallout for Real Estate

So there's a lot of different arguments about whether these tariffs are, uh, a net benefit or if it's hearkening back to the protectionism and mercantilism of old. And there's a lot of, you know, all the, the Nobel economists say the tariffs are terrible, but maybe there's more to the story than that. Yeah. And so Josh, Patrick, I wanna hear what you guys are seeing on the ground, um, different data you're reading or seeing or thinking about. And so, Josh, I'll start with you.

Before we started recording, we were talking about how. Um, there's, um, there's a bigger picture when it comes to a lot of these kind of moves. It could be manufacturing, it could be the federal deficit, it could be, um, something that you mentioned a few episodes back about where, um, the market turmoil we're seeing is. Yes, a short term pain, but maybe there's some long-term benefits.

Maybe there's, uh, a story with the treasury rate coming down and restarting some, some capital investment from, from different, um, sectors of the economy. So I'm curious, what's your read on what's going on right now and how do you like, interpret it? Think about it. How should investors and listeners be thinking through this, what they're reading in the headlines right now?

'cause I know it can be painful and scary depending on where you're coming from, uh, in the market right now, but remember. The market is not the economy. Those are two different things. So help us, help us think through that. Patrick, I know your, your data whiz, um, so I'd love to hear some things that you're thinking through too, but yeah. Josh, I'll start with you. What, what's your take on all this?

Uh, the middle class has been suffering, uh, quite a bit because of the loss of jobs and the lack of high quality jobs, um, in that sector, in that area. And, uh, by bringing those jobs back, uh, or incentivizing other, even other nations, to invest more heavily into the United States, which would also. Um, create jobs, both, both, uh, United the American companies kind of reinvigorating and, and building back and manufacturing coming back.

But then also foreign investment coming directly in, um, creating a better, um, better quality higher paying jobs for the lower to middle class. Um, ultimately in a 70% consumer driven economy will lift all boats and will make, you know, it gives real opportunity for the United States to be, to be prosperous. Um, you know, but. You can also look at like, just, just recently, the reciprocal tariffs. You've got the, the, the 10% baseline, and then you've also got the reciprocal piece to it.

And, and I think those can absolutely maybe be separated in terms of what their ultimate purpose is or the goal behind them. Uh, the 10%, I don't know if it's going anywhere. And I think Trump is, I mean, he, he's everything he said in his campaign, he has stuck to, uh, the administration has, has, has, have done, um, thus far what they said they were gonna do. So I don't know that we've got a real.

Uh, good case to doubt that, um, that they mean what they say and that those, that the 10% I, I think is, that's where they see the value in the revenue. They, they say, you know, five, six, $700 billion a year over the next several years equals, you know, trillions dollars in revenue, um, that, you know, can, can offset some, some, uh, tax cuts. Um, that it could also pair with some deregulation to really, um, get the, get the supply side of the economy moving.

Uh, now the, so I think there's a lot of benefits in, in addition to the jobs that we talked about earlier, but the reciprocal side, I'm just curious, I, that to me may be more of a negotiation tactic, um, in order to get, uh, better deals on the table to, to really attract, um, foreign investment, uh, directly into the United States. So I, you know, it's, uh, I, I, I think that, um, really the, the mindset behind ultimately the, the good that the terrorists can bring is a good one.

I think that the country needs it. It's also better for security to, to onshore some of the, um, essential products and, and, uh, supply chains. We saw through Covid when everyone, globalization. Globalization has been such a big deal, and then covid hit and everything shut down. Well, if you can maybe protect, um, your country and your, and your, uh, production of goods, then.

Going through a big shock like that isn't as painful, you know, so, so we're, we're seeing, I, I think there's a lot of good that can come from, um, you know, the philosophy of tariffs, the, the implementation, the practices. It's just, it's, it is shocking. It's something that, you know, it's, it's, it's shocking the system and we're seeing that, and you've got people pricing in, uh, recession, uh, recession because I think the tariffs are gonna really, uh, impede growth.

And there's a good case for that. Right? I mean, I, we talked this morning, I was talking to, um, a friend of mine who owns. A concrete business, it said steel's going up, uh, ca price of cables are going up. Um, you know, so we we're going to see some, some immediate price increases, uh, while just during the time that it takes to kind of reassess like supply supply chains and, and figure out ultimately where the, where the tariffs are gonna land.

In the short term though, we know what things are gonna cost, the increased cost is gonna be, um, so it we're, it's having an immediate effect. Uh, for us in real estate, I want Patrick to jump in 'cause he, he knows this stuff. Um, he knows the numbers much better than I do, but I mean, it, it's gonna have an impact on new development. We've seen it like from the, the, the guy today on the concrete. Um, but that's all through the development process. Um, all the materials that go into that.

Um, so what does that mean for existing real estate and, you know, potential value there? Patrick, you gonna jump in on that? Yeah, I think, um, I don't, I'm, I think, I don't know what to think truly. Uh,

Everyone on Wall Street and otherwise probably agree with that statement, but I think there's a big difference between how imminent the current administration thinks that that is versus how everyone else thought it was. So to implement these tariffs as aggressively as they are. And Trump talking about, you know, surgery and this being an operation that needed to happen and all that.

I, I think it's just because they view the bill coming due a lot sooner than everyone on Wall Street did because we still have a really strong economy. And so I don't know which side is right. We, everyone agrees it needs to be dealt with and we're just kind of the market's figuring out how quickly that's gonna be dealt with. And so. Um, I, I think I'm in the, the same camp as Josh about the large nature of the tariffs.

I think it, it, for some reason doesn't get a ton of coverage, but like this just straight out of Trump's playbook. It's like you always come out swinging with the big number and now. Psychologically he has an advantage to where if he negotiates a 40% tariff down to a 20% tariff, which is still massive, it looks like there was a great deal struck. You know, so I think that's a big piece of it.

As far as what it means for like us in the real estate world, um, slower development is going to mean less supply. So that's what I was getting. Yeah, that's wanted to take it. Um, it's gonna mean less supply for the stuff that's already there. So if you're talking multifamily, it's just gonna mean, um, more, less availability for someone to rent. And so interest, I mean interest. So rents are, um, gonna probably grow at a faster clip than you would've expected them to grow. Um, and for housing.

New single family homes being built, um, is probably gonna slow down. But mixed with all that too is what is the impact that all this has on the person renting or the person buying the home. And so if this shock is too great to the system and we get plunged into.

A recession where there are a bunch of corporate layoffs coming because one, it's hard to plan and everyone's frozen right now, uh, because we, they are unsure about how these tariffs are gonna be implemented, and the timeline is being held to right now, but has been extended in other circumstances over and over again. So you don't really know when it's gonna happen. And so when it does happen, how.

And it's pretty clear that the US consumer can't foot the entire bill of what these tariff increases will do to the price of goods. So the corporations are gonna have to have their margins eaten into to bear some of that also. And how many layoffs does that create? So, uh, and then so then how good is the state of the renter or the home buyer? And how does that, you know, in the end affect asset prices? The big questions out there right now, and, and I, I personally, I don't think it gets there.

Like, I don't, I don't think we get to, uh, that point where the tariffs are, it is just, uh, all or nothing. We're going for it regardless of the fallout. Like, I, I think that's something that as a business person. Um, you've gotta be nimble and you've got to take what the data's telling you. You gotta make decisions based on it, and you've gotta look out and see, uh, you know, beyond, um, you know, where you are and, and, and how to, how to adapt, how to move and, and how to prevent.

I think some, like, what would be maybe a catastrophe if it, everything just shuts down and stops. I mean, that then we're talking about a deep recession. I don't think anybody wants that. Yeah. Um, you know, especially you've got the midterms coming. You think about just politically, nobody wants that. Um,

And, and it's, he's been very successful doing that. Mm-hmm. So, I, so I, I think that, uh, that's probably his, his game plan here. I mean, that's on a whole nother level. Like that's, you know, their, their level of negotiation with other countries and stuff is, you know, that it's, it, it's way up there and beyond, beyond what I understand.

But I think that if it does start to have, and we're seeing that the stock market went, you know, nuts the last couple days, and then all of a sudden Trump comes out and what does he do? Hey, I'm having great conversations. Hi. His whole, like, his whole team around him is saying, Hey, we're having great conversations. What happens? It calms down a little bit. So I, I mean, I, I think that there is going to be some level of, of tariff and it is gonna have, um, consequences both good and bad.

And maybe in the short term it's gonna be a little bit more painful. But I do think that they're adaptable and they're trying to get the best deals that they can get. And I agree. I think what Patrick said is true. I mean, they've got insight into information that we don't, and I think maybe, maybe the economic picture is a little bit more dire than what we realize. And we really don't know how much of those numbers were inflated. I mean, we, we, we don't know.

Like we, we got revisions on job numbers constantly last year. Um, we don't know the true inflation numbers in the, in the impact that it's, that it's having. So. Uh, especially on the people, uh, you know, in the lower to to, to middle class. We know that it's not good. We know that there's a lot of struggle. Um, so I, I think there, there's, and we also have a looming, we talk about it all the time, the debt wall in commercial real estate that's coming.

So if, if you're, if you're doing something that all of a sudden makes it more affordable, uh, to refinance or more feasible, I should say, to refinance, um. You know, commercial real estate that, that's important too. 'cause commercial real estate goes down in a big way, then that's gonna hurt, that's gonna be incredibly painful throughout the economy. on, on that note, I mean the silver lining of Friday and Monday's blood bath was that treasure yields fell substantially.

And then that was, you know, all of a sudden was that was the chest move that. The administration was making was, let's take tank yield oil two so we can Oil Yeah. And oil two, oil two. So we can refinance a lot of this debt and, you know, get our interest payment down to a more reasonable level. Uh, but then, uh, I mean, if you're looking right now, I think we're back at four 20 on the tenure. It popped up. Yeah, it popped it up. Um, so th that hasn't necessarily materialized sustainably yet.

It could go back down. I think there's a lot of o other reasons for why I think we're seeing a range. Don't you think, like, do you think you guys we're kind of seeing a range? Like, 'cause what was, what do you think was priced in last week? I mean, pri like, like, like spooky, like recession was priced in or like stagflation and what did it go to? What was it? The, yeah, I mean I, we've probably gone up four quarter, 30 basis points since where, from where we were to where we are today.

I just wonder if we're starting to see. If it's becoming a little bit range bound, which is positive, 'cause you can then start to kind of like, make decisions or, or plan for things that no one knows. But if all these, like different scenarios were priced in, in the, in the 10 year, you know, went up to four and a quarter, or it got down to as low as what, like 3, 7, 5, I mean, it went, went way down 50 points. I mean thereabouts, like I think it was historical moves the last couple days.

Um, then people are pricing in these different scenarios and you can kind of, kind of see, well, if this stuff happens. That maybe we're fine. We're kind of getting, and maybe it's no longer, like maybe the ranges are just a lot more volatile, um, than what we're used to over the last, you know, so many years. But we're seeing like, okay, if, if people think this is gonna happen, this is how far that yield's gonna go.

If people think this is gonna happen, this is how far maybe that yield can drop. Because there's other things at play, people are still concerned about inflation. Um, and that's a big one, right? It's recession around inflation or, or stack inflation, um, you know, is one that we're hearing a lot right now. Yeah. And I don't know. I mean, so if, if we're gonna settle in the like low fours on the tenure, then like then none of this was worth it. If that was the goal. I mean like that's where we

Um, so I think, but I think what happened yesterday with the Big U moving yields was there were a lot of, uh, wall Street firms who had purchased a lot of stock on margin that had margin calls after the declines. And so they had to sell a bunch of bonds. That's at least my theory because the other popular theory is that China is retaliation, started dumping a lot of their, um, US treasury holdings. And looked at all the other country's 10 year bonds yesterday, and it was up everywhere.

So, um, I don't think that that makes a ton of sense. So I'm, I'm hopeful that this was, you know, people needing to generate some cash real quick and selling some bonds. And we'll start to trickle, we'll trickle back down a little bit today. So, um. But the, the silver lining was, hey, lower interest rates in our world is gonna create, uh, more attractive refinances gonna stimulate home buyer applications. Mm-hmm.

Um, but if that's gotta materialize and it's gotta be sustainable, it can't be 30, 40 basis points swings. 'cause that's not gonna activate anybody any action. There's pause, people just, just sit it out. Uh, too much volatility just cause people to not wanna do anything. In fact, it is.

Is this a time to be looking at making moves and investments, or is it time to sit back and kind of like, kind of watch what's happening? I don't know. Like, like, I guess what I'm trying to get at is like, given what you're seeing, what we know. Um, and there's all kinds of theories. What do you do? Like, what is the next step? You know, what is the, the, the playbook here?

Just take a breath for just a little bit and just see, um, because it's been so volatile in the last few days. Um, as much as you can, like we've got deals that, uh, have maturities and we've got a refi. I mean, there, there's no, you know, we can maybe work out an extension or something, but, um, that's not gonna be real long. So, I mean, there's, there's things that we've got to move on, uh, and we're just praying and hoping that, um.

Rates will, will work in our favor as that, as that day gets closer, uh, on like, but we, on our lending stuff, I mean, we're looking at a deal. We were had a deal around the street. It was two acres that were gonna be, um, that was rezoned and replanted into four really great lots in this great community. And, um, you know, the numbers were good. The numbers made the deal work economically. It was, it seemed like, you know, based on where the comps were for the finished product.

Yeah. It, the deal could work for a builder that wanted to go in and. And, and finish the development and, and, and build it out and, and, you know, sell it custom. And it was that kind of location. Uh, but surprisingly the builder interest waned, like, because of over the last few weeks. Um, you know, there's, 'cause it's a long process. So when you're thinking about that, you're thinking about, well, the development could take, you know, six, six months to, to nine months, somewhere in there.

Um, and then you've gotta build all these houses or you gotta wait in, in this case, I think the, the play was. Probably to wait on, on, somebody come in and say they wanted to build a custom home on the, on one of the lots. So, I mean, you're looking at 12 to 18 months. Um, so then you've got even, you know, there's, there's more that goes into that. Uh, where's the market gonna be then?

Um, you know, if the market's, if, if the market's gonna soften a little bit, um, then I'm, and I'm paying too much today, uh, for, for what? These lots, lots cost. Well, the seller today thinks they're getting a good deal because by today's numbers. Yeah, it could work if you could have the house built in two weeks. Yeah, I'd say it's, you know, I mean that's, but you know, if you could have the house built in the next, you know, few months, it, yeah, it, it works. But that's not reality.

Um, so I think there's, there, there's, there, there's still opportunities to be had, but it may be like we talk about a good buying opportunity, um, if you find sellers that need to sell, in this case, um, the owner didn't, didn't need to sell. At least that's the indication that we got. Um. But in, in other cases where life circumstances do dictate, Hey, we gotta go, then it could be a buying opportunity because what I'm seeing, typically when it gets chaotic, most people do step back.

So the demand, um, goes down. Um, so when demand goes down, price goes down. So I think it's gotta be really opportunistic. Uh, you know, I, I think you're, you're okay if you just stress test, um, whatever investment you're gonna make by. You know, just, yeah, it, it's different depending on the, on the product type in the area, but stress it based on, hey, if things go wrong and you, you have to apply a number to that scenario, what does this look like?

Um, and, and you know, if you can, you can fix your debt, you can do that. Some people would argue, don't do that right now, you know, there that's right. Rates are coming in and we're talking more bridge debt. Um, some, some bank debt too, but the, on the development side, it'd be more prime driven. But those, those rates likely come in. You don't necessarily wanna fix your debt and. Uh, a lot of development stuff too. Banks don't wanna fix their debt debt either.

They may, the banks probably do wanna fix it today.

That your underwriting is right, that your operation is right, that you've got the right team around you because the implementation in times like this is absolutely critical. You, you, you're racing against time. Um, you don't have a lot of room for mistakes if the market's changing. And that's true of, of any time, but especially now when things are on such dramatic swings. Um, just make sure your process is right and there are, there are opportunities out there.

We'll see, like this lane we're talking about today, I mean. Uh, we could come next week and all of a sudden there's a significant price decrease. Well, now it's like, hey, yeah, it's volatile, but this is a great deal. We know that given on the historicals of the area, the trends in the area where, where it's going. The other comps, uh, you know, we've got enough people that saying that development costs are, are in line. Like, yeah, this is a good deal. Like this is a good deal.

We're gonna be, you know, we, we need to move on this. Um, and that's when a lot of people make, build their businesses and, um, you know. a lot of money is, is when they're willing to take those calculated risks. And a lot of people are, are sitting it out. But like I said, but I, I, I think sometimes sitting it out is the right move. It's just, it's, it's so, it's so deal dependent.

Hearing, you know, headline news or the administration makes some kind of announcement or policy adjustment or something, how do other countries react to that? Or how do other leaders react to that? So, for example, this is a very small, limited example, small market, but, um, when a lot of tariffs were announced, uh, the Canadian whiskey world, uh, became very irate about that. And there were a lot of stories of stores shoving, you know, Kentucky Bourbon.

Off their shelves, essentially to just have Canadian whiskey. And again, it's a very small, uh, market and a very extreme example, but that kind of thing, like how are other people, other countries, other industries kind of taking this news is something that I'm thinking about. But I'm, I'm, yeah. I'm just wondering if there's anything that you would advise folks that are listening to kind of pay attention to or think through along with you as you guys are thinking through it. It.

And I, I, the only reason I can really, really think that of why that's the case is that there, what's being priced in there is the, like, complete deterioration of the consumer. Um, I can't really, maybe I'm just not seeing the picture clearly, but I can't think of another reason why that would be happening right now. Um, and so my hope is that that is a reaction of, Hey, let's go to, let's play out this worst case and see what happens.

And if they end up in a better position, then you'll see that kind of start to make a comeback. So, but I think that's all just a fore. The publicly traded commercial real estate owner groups are just kind of a forerunner of what the sentiment in the private markets are. So. Uh, I suspect that you'll see that start to improve as we kind of absorb all this and start to get the first, uh, employment readings after all these tariffs take effect and all that.

And I, um, I think that I, I'm hopeful that that will start to improve that outlook.

And immediately sent him and said, Hey, are you seeing buyers, um, come into the table more aggressively with, you know, half a point drop in rates, making financing a lot more favorable? And his feedback was really good and wise, and it was basically like that. That's just gonna take time to soak through. Mm-hmm.

And so it's not like there are, um, groups with millions of dollars who are waiting for that one, you know, half point drop in rates to where everything suddenly makes sense and it's go time. It's, uh, going to, I think, take a little bit longer in the private markets to show that the trajectory is there. That even when financing is favorable, that the long-term outlook is favorable too. Um, because these guys have to go raise money to do these deals.

And, um, you, when anyone's skittish who would be investing, they've gotta see really strong returns.

So what you guys are saying makes sense. Even on the, the real estate side. Well, any, any parting thoughts on, you know, things that are happening this week or, or things you'd encourage folks to, to take note of?

You've gotta try to keep the fear and the anxiety out as best you can. I mean, on all like media, social media outlets, you're gonna be, you know, hit with that. And, and it's, it's really, it's what gets attention. It, it's, it's, um, ultimately what gets clicks and eyeballs, and I get all that. So, um, and it's entertaining. It is, for whatever reason, like doomsday stuff is, is entertaining. I mean, I don't know why we, we feed that, but it, it is something that we all seem to be drawn to.

But, so, I mean, for me, you know, for us, for our business, we gotta have faith that, uh, the, the lord that we, that we serve is much bigger than everything here that we're talking about. I mean, so much bigger. Um, it ultimately controls, uh, what happens to us. And what, what, what happens to, to everybody. And so it, it's a good reminder. It's a good like, kind of faith tester. Like where's your, where's your trust?

Like, do you have resolve knowing that, that ultimately, like this life is short, there's gonna be little stints of turmoil. There's, it's gonna be painful at times. I mean, Jesus told us that, like even to, to his followers, he never said it's gonna be, you know, easy. Uh, it is actually gonna be hard. And so when those, when these things come. Um, you know, it, it's a good chance to really see where you are and for me to see, see where I am when I wake up in the morning.

Am my am, am am are my thoughts faith focused or are they fear focused? And, and that's something that I've really been, been working on, um, you know, for, for a while. I mean, it's an ongoing, probably working on it for the rest of my life. Uh, but you know, when, when we're faced with these challenges and like your friend said, and like, we want the same thing. We just want clarity. We want clarity, and that's when your faith has gotta be strong. Because I don't know that we're gonna get it.

I don't know that we're gonna get it, but there are things that we can be clear about and that that's things that, that we can read in scripture and we can pray about and, you know, that, that we know we can get in community and talk about. There are, there is a lot of clarity in this life. Um, but right now, like in, uh, and I'm, I'm talking about in this life, in, you know, in, on a spiritual level, but I, but what we're talking about right here, I don't know.

We're probably not gonna get the clarity. So it's just, it's just a good opportunity for us. It's a good opportunity for, for anybody to, to just kinda see what. See what your foundation is and if it's getting rocked, then you know, I don't think life's gonna get easier. So you look to make sure that your foundation is strong.

We just have to make a bet and take a, take a leap of faith that the Lord will provide, that we're gonna make the right decisions. Now take, you know, calculated risks, calculated bets, make the decisions we need to, while we have a little bit of time. And, uh, and just hope that it works out in the coming months. So, yeah. Yeah. But it's, but it's scary, you know, doing that.

It is just, it's just a matter of where do you go with it?

And I hope that, um, people feel that, that they feel that kind of like, um, that, you know, basically like everything's gonna be okay. The Lord will provide. And there's some stories out there that may or may not be true, but here's some things that are true and that, that look like. Um, that help us make those decisions that we need to in the meantime. So anyway, I'm really grateful that I get to talk to you guys and, uh, that the listeners get to hear from you every week.

And so we will have, uh, more content coming out on this 'cause I know it's, it is affecting markets. Um, and so hopefully we'll get this, um, uh, newsletter coming out very soon on this topic. Uh, blog on this topic.

And if you guys ever wanna reach out to the team, go to alx realestate.com, subscribe to the newsletter, find us on social media, ask questions like, let's, let's all kind of figure this out together and, and talk through things and what you guys are seeing, um, in the markets as well. So, Josh, Patrick, thank you and we will see you next week.