TRANSCRIPT 🔗
Speaker 1:
0:00
Trump's new tariffs are shaking up the economy right now, but how will they impact commercial real estate and self-storage investors looking to get their next deal and obviously try to make a living. That's what we're going to cover today. So why does this matter? They affect industries like construction, lending, obviously investing and especially real estate. Commercial real estate investors, syndicators, those who are raising capital from other passive investors, and passive investors themselves need to adapt. So we're going to cover how tariffs impact commercial real estate on a broad scale, specific effects on self-storage and strategies for investors moving forward. So stick around to the very end.
Speaker 1:
0:41
So, first up, trump's new tariffs and economic impact. What is that going to look like? Trump was going to impose new tariffs 25% on Canada and Mexico and then 10% on Chinese imports. As of today, february 3rd, the recording of this video, the pause has been placed on Canada and Mexico, and China is still going to take effect here pretty soon. However, that's for a month. A one-month pause there on Canada and Mexico. It's justified as a way to address immigration issues, fentanyl, etc.
Speaker 1:
1:18
Some reporters were asking Trump earlier what can these countries do to prevent the tariffs from going into place? He pointed to the immigration situation and the drug fentanyl specifically. So he wants to stop all that. Those are good things, of course. Stopping that flow into the US is a good thing. But how will it impact the economy as a whole, that you and me and other investors out there? A couple of ways.
Speaker 1:
1:40
Number one inflationary pressure. So a tariff is basically a tax right. It makes things more expensive that we would import from overseas. That drives up the cost for businesses and obviously that cost gets passed on consumers like you and me. It could delay also Fed interest rate cuts. So we want the Fed to continue lowering rates. That can help spur some economic and business activity. It can spur borrowing Rates go down. Borrowing costs go down. Therefore you might want to apply for a loan to be able to buy a home or a car or whatever. The point is that if the rates don't come down and the Fed doesn't lower rates, borrowing costs will remain high. That will obviously coincide with that inflationary pressure. The Fed won't want to lower interest rates because then people start borrowing and that can push up inflation even more. Then you have some market volatility as a result. So you've seen over the last couple of days, even into today, just the whipsaw action of the market of just the S&P 500 and stocks in general. It's because there isn't stability. It's one week we're going to impose tariffs. Then, as of today, we're not going to do it, we're going to press pause on that. For a little while, some people have speculated that Trump is using the threat of tariffs as a
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way to get what he wants concessions because he doesn't really actually quote unquote, doesn't really want to see the stock market obviously go down on his watch. So we'll see how that goes.
Speaker 1:
3:03
So inflationary pressure, market volatility and, lastly, rising construction costs. So steel, think of steel, aluminum, those metals that we import from overseas, especially from Canada, mexico. I just read an article today which I'll link in the description, that we import most of our steel, metals, et cetera, from an aluminum from Mexico and Canada. So if Trump imposes a 25% tariff on those items, it's going to make construction costs much more expensive for everybody else in the commercial real estate industry, obviously in the automotive industry, the canned goods industry, other industries as well, but we're talking about commercial real estate here. So you think about buildings going up, commercial real estate, right, if you go really high above, I think it's five stories or whatever it's got to be made out of metal According to most building codes. Storage typically it's made out of complete metal, flex warehouse same idea. So that steel and aluminum cost is going to go up.
Speaker 1:
3:57
An article that came out today I think it was in the Wall Street Journal talked about. The price of that is already going up. So let me know in the comments if you've already seen that price increase hit your budget. The cost of those metals will be going up, if they haven't already. And that brings us to the sponsor of this video, bbi Constructors. If you need someone to help you with general contracting or design build services, bbi Constructors is your Visit. Bbi Constructors with an S dot com forward slash contact. Reach out to them. They'll get you set up. They're a great company. Link is in the description below.
Speaker 1:
4:37
The impact on the economy inflationary pressure, right Tariffs are attacks. Prices of stuff goes up. That keeps prices high. That's inflation. Market volatility the markets don't know how to react to some of the news coming out of the white house and some of the changes as well. So there's a bit of volatility there in the sp500. Obviously the stock market etc is what I'm talking about. And then rising construction costs uh, that may have already started to hit, regardless of the tariffs. Let me know in the comments. But if we do get tariffs in place in about a month or so, because we import so much metal from steel and aluminum from Mexico and Canada, it's going to really affect the cost of construction going forward for commercial real estate and self-storage as a whole. All right.
Speaker 1:
5:21
So let's dive down more specifically into commercial real estate. How does it affect those in that industry? Higher development we've already alluded to this, but higher development and renovation costs, right. So if you're going to go remodel a multifamily project, you're going to redo the inside of it. Of course it's going to cost for that refrigerator or the washer and dryer. If you have any other stuff in there that you have to redo, break into those walls or whatever, those renovation costs will likely go up, and obviously within commercial and within self-storage as well, which we'll get to here in just a minute.
Speaker 1:
5:53
Interest rate uncertainty with commercial real estate lending. So if we don't know where interest rates are heading, it makes it really hard to gauge and price loans. We want rates to come down right. That's going to help us, it helps our valuations et cetera. But it's most likely going to stay at least where it is. The Fed will be unlikely to lower interest rates if we see tariffs hit. They don't want to spark those inflationary pressures and start moving inflation in the wrong direction Again. If rates remain high, it keeps borrowing costs high. That means higher rates, means lower cap rates, lower valuations for your properties, so it can affect us there in the lending space and then the investment shifts right.
Speaker 1:
6:30
So we're seeing, actually, according to the news, some hedge funds and institutional investors have shifted their capital into real estate because they see real estate as a hedge against inflation. You can raise rates, meaning what you charge tenants you can raise rates according to inflationary pressure. So if inflation is going up you can raise rates, presumably on those tenants. So they see hedge funds see real estate as a hedge against inflationary pressures. So you see some more capital inflows into the public real estate markets like REITs et cetera. You'll have to see slower new construction, right. So if construction costs are high, interest rates are high.
Speaker 1:
7:05
To borrow to build that building, we got to have high rates of charge to the tenants for that space. Sometimes the numbers don't match up there, right? Slower new construction is probably what we're going to see going forward. It's going to be really hard to make the numbers work on paper. If you're trying to build that new building, that new self-storage facility, you got to have decent rates and, as we've seen across nearly every single market across the US, according to Yardley Matrix, rates have been down year over year and nearly quarter over quarter. In a lot of markets and most markets across the US, we might see retail and office struggle, whereas self-storage could remain strong, just because you have the shorter term customer. That's really a toss up, meaning that it's easier to move your rates according to inflation within self-storage. So if we see inflationary pressures remain, prices being high, we might see the prices for units tend to go upward, trend upward. It just depends on what happens with the rest of the economy, if Trump and his administration can get the economy moving in the right direction, although he has said that there might be some pain in the short term.
So it's a mixed bag on that front. As far as the effect on the consumer and the effect on actual rents in the self-storage market.
Speaker 1:
8:19
All right, so that brings us to the last section on the impact to self-storage. Specifically, rising development costs are probably fewer projects getting approved and moving forward because of the cost of construction steel, metal, et cetera. Also, something I didn't mention earlier on, but the cost of labor. With the immigration situation going on, we know that a lot of construction workers from other countries, mexico specifically. If we see a lot of immigration issues continuing to happen, there could be a shortage of skilled labor, a higher material cost and higher potential labor costs as well.
Speaker 1:
8:54
We might see a shift in strategy. So if it's going to cost more to build, it makes more sense to buy right. If you can weather the fact that interest rates might be a bit higher, it's going to be ideal to purchase a facility that is stabilized. Maybe put some low leverage on that. You may not want to try to raise more equity, but that might be the way to make the deal work. It just depends on the rents and a number of other factors, but most likely we would see a shift toward existing acquisitions versus new ground up construction. You just never know, but I think it's leaning in that direction, at least at this point. So that's the impact on self-storage.
Speaker 1:
9:29
What's the impact on passive investors, those who are looking to create cashflow for the future and pass on that on to the next generation or just go to the beach. What's the impact going to be on those folks If higher rates exist? If tariffs go into place, that keeps inflationary pressures up. Then the Fed keeps rates where they are. Hopefully it doesn't raise them anymore, but at least keeps them where they are, which they have. They are higher obviously historically over the last four or five years. That also means higher debt payments going forward, so that reduces cash flow for investors. So if you have a floating rate loan, your debt payments are going to remain high. Therefore, the remaining cash left over for distributions to passive investors could remain low.
Speaker 1:
10:10
So we might see some of those preferred returns deferred, reduced or just overall delayed or try to be caught up later on when the property is sold, which impacts higher rates could impact property values, right. So if you have higher interest rates, you're going to have higher cap rates and, as a result, lower property values. Cap rates move inversely to value Higher rates, lower value, lower rates, higher value basically. So that can affect investor equity when it's time to sell the property. So that could be a bit of a problem there. There could be a longer holding period. So if you're in syndication or a fund that has a, let's just say, had a five-year hold and then maybe two year extensions or one two-year extension, meaning it went from five to seven years or from five to seven to nine years.
Speaker 1:
10:57
Potentially you might see that happening where you're not going to get your capital back anytime soon. They're waiting. Syndicators and funds are waiting for better times to sell if they can. They're going to be kicking that can down the road. So investors passive investors should be expecting longer wait times to get their capital back to be able to put the work in other deals, which might not be a bad thing. It just really depends on your personal situation, all right.
Speaker 1:
11:22
Lastly, here sponsor selection needs to become critical. So if you're a passive investor, you need to find sponsors who underwrite conservatively and use conservative leverage. You don't want to be over levered on a deal. It just depends on the deal rents, location, the plan, et cetera but you want to be aware of that. Lower leverage is going to be a lot better for you in the long run. We've done some deals in the past at almost 50% leverage and those have done with fixed interest rates. Those have done really well over the last couple of years. None of the worries of the variable rate loans that are out there, all right. So it might be an opportunity as well.
Speaker 1:
11:57
Lastly, for some well-capitalized investors looking for an opportunity to purchase some properties at a lower valuation, if those sellers are willing to let them go at that lower valuation point, all right. So a couple of takeaways. Trump's tariffs are reshaping the market right. Rising costs, interest rates and inflation pressures are really a key concern for all investors, both active and passive. They're looking for deals and passive investors looking to place capital. If we have rising costs, we have inflationary pressures, we have higher interest rates that remain longer, that could spell to be a trouble. That could be spell a little bit of trouble down the road, but we'll see Right.
Speaker 1:
12:34
Commercial real estate investors we got to adapt right, so we got to be prepared for that. We might see less development need to go after more acquisitions of stabilized properties, put lower leverage on them if possible and hold them for a bit longer as we ride out this wave. Now there could be obviously there always is going to be some sort of surprise in the economy. We could see stronger GDP growth towards the end of the year. We might see a stronger stock market towards the end of the year, I don't know, but just in the short term, these are some things that we should be aware of.
Speaker 1:
13:02
Storage investors in particular probably focused on acquiring existing assets over new builds. That kind of makes sense, right? We're going to have to really look closely at deals for construction costs just to be careful of the construction costs and the materials costs and the labor costs as well. Those could be, or may have already been, rising over the last month or so in preparation for tariffs, and we got to monitor some rental rates. So the consumer out there, the people that we're going to rent to, how are their pocketbooks looking? Where are we building? Where are we buying? Are we in those markets where those folks can afford the rents that we need to have to weather the storm of higher interest rates for a bit longer here, something to keep in mind All right, investors, be prepared for lower distributions, maybe longer hold periods as well.
Speaker 1:
13:47
Try to focus on sponsors with conservative underwriting and maybe keep some liquidity at bay in the savings account for future opportunities, something to that effect. What do you think? Let me know in the comments what you think might happen down the road with these Trump tariffs and how it can affect commercial real estate and self-storage. Are you in any deals right now where the period is being extended out? I'd like to know in the comments. That's it for this video. Hope it helps you. I'll see you in the next one.