Since taking office, President Trump has picked a fight with, well, just about every major U.S. trading partner, but he has shown particular hostility to China. We’re not saying China doesn’t deserve it. Their history of currency manipulation and intellectual property theft are beyond the pale.

But this isn’t the time for questions of moral hazard. We are on the brink of a trade war between the world’s two largest economies, and the corner offices of corporate headquarters around the world quake with trepidation.

Are We Making Too Much of This?

Not so much the offices overlooking Wall Street. Each time an @realDonaldTrump tweet declares a new tariff, the stock market takes a small hit. Every time that Twitter account announces a resumption of trade talks, equities rise a tad. But those gains and losses net out over the course of a few trading days because there’s no real news there. 

At this point, we’ve been on the precipice of a trade war longer than most trade wars actually last. The worst part of the situation is the uncertainty, right? Isn’t not knowing what’s going to happen next with trade far more toxic to the economy than actual trade barriers? One would think, but it’s not.

One thing that must be acknowledged, regardless of one’s political predispositions, is that the current administration is riding the longest economic expansion in history. There’s a question of causality, of course. Presidents always get far too much credit for economic growth and far too much blame for contraction. Plus, there are those who say that Trump is taking bows for benefits that ought to accrue to decisions made by President Obama. And for the first year or so of the Trump administration, that case could be made. But at some point, Trump has to be ceded ownership of the burgeoning growth of both payroll and gross domestic product.

And economics professors can cry in their beers over this all they want, but the Trump economy is roaring despite his making all the “wrong” decisions. He has shown disregard for sound fiscal policy by busting the budget. As for monetary policy, he has harangued the Federal Reserve into cutting target interest rates when lower-volume voices called for leaving them alone or actually raising them. And, of course, Trump has defied the conventional wisdom that trade barriers are harmful to the economy.

Even if the conventional wisdom turns out to be right and trade wars are bad, that doesn’t necessarily mean that they’re equally bad for everybody. Bisnow’s Matthew Rothstein wrote a compelling argument about how commercial real estate could be the closest thing the U.S. economy has to a safe haven during a full-scale trade war. He points to the strength in REITs as compared to securities mapped to other industrial sectors.

Details Matter In Multifamily Real Estate

Predictions of recession tend to become self-fulfilling prophecies, so nobody wants to press the Big Red Button unnecessarily. Still, it’s hard to imagine that the current sweet spot will last forever.

Already, 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. According to CNBC reporter Diana Olick, architectural firms are not pulling in design contracts like they used to. She quotes the American Institute of Architects chief economist Kermit Baker as saying “the ongoing volatility in the trade situation” is one contributing factor.

And let’s remember that this brewing conflict isn’t a trade war against Mexico which, although it has an outsized effect on the U.S., is really a middling economy. And it’s not a trade war against the European Union, which can be relied upon to abide by the same rules of the road as the U.S. endeavors to. This is a trade war against China. (Actually, the U.S. is in low-level trade wars against both Mexico and the E.U., but that’s not the headline.)

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. According to private lender Jeff Levin, all-new Chinese direct investment in the sector evaporated in an instant.

Trump’s aggressive posture “alarmed China’s central bank, and to contend with slowing growth, it put the brakes on international capital outflows,” Levin wrote in Forbes. “The trade war between the U.S. and China continues to fluctuate, but the pullback of Chinese investors endures. In the first half of 2018 alone, Chinese investment in the U.S. plunged 90%.”

Impacts of a Trade War on Multifamily Projects

Levin goes on to state the obvious: that the most immediate impact of a trade war on multifamily real estate is that the prices of steel, aluminum, and other construction materials go up. And while it’s true that tariffs punish Chinese companies by making their intermediate goods more expensive, it’s just as 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. According to the National Association of Homebuilders, tariffs should increase the average multifamily unit cost by only $478. That, reports Jacob Passy of MarketWatch, is in contrast to the $6,000 to $10,000 added to the cost of a single-family home 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. According to Levin, trade tensions with China are at least partially responsible for delays that builders are seeing already, which adds another five months to what should typically be a two-year project raising a multifamily building. That’s five more months of contractors who need to be paid, as well as five more months when the entire economy could enter a recession and the entire project go belly-up.

Mixed Signals for Multifamily

One interesting take on this whole topic comes from Robert R. Johnson, a Creighton University finance professor.

“The specter of tariffs and escalating trade wars between the US and China … has led to US Treasury rates falling, leading other interest rates—including mortgage rates—lower,” he told Erik J. Martin of The Mortgage Reports.

Lower mortgage costs should more than counterbalance — if the NAHB’s analysis is correct — the added expense of material and labor. If that turns out to be the case, the result should be net-neutral to multifamily housing. Investors tend to be indifferent if the structure they financed is rented out by the year or sold off as condos.

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.

As long as the current Sino-American tensions stay focused on trade, the U.S. multifamily market should ride it out with little trouble.  But if it turns into an all-out economic war — that is, as soon as one side or the other begins to believe it’s losing — 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.