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A Trade War with China is the Biggest Threat to Southern California’s Real Estate Market

23 Apr 2018

Pundits are searching for a development that might abruptly end the recent prosperity in Southern California’s real estate market. If tensions continue to escalate, a U.S. trade war with China could be the culprit.

President Donald Trump tweeted April 9 that the nature of American trade with China “sounds like STUPID TRADE – going on for years!” Lamenting the U.S. trade deficit with China, Trump had already threatened to impose tariffs on $50 billion in Chinese imports. For its part, China recently announced that it will impose new 25-percent tariffs on 106 U.S. goods.

All the harsh discourse on U.S.-China trade misses an important point: the tremendous advantages the U.S. reaps from commercial relations with China. In this instance, Southern California’s real estate market is the perfect case study.

The enormous impact made by Chinese investors represents the single-largest change in the Southern California real estate market during the 21st century. The vast majority of property dispositions that our firm, Hager Pacific Properties, have made since 2000 have been to Chinese buyers. Typically, these buyers use all cash and do not require a financing contingency. Chinese cash has driven up property values and filled up warehouses in Southern California.

China’s continued rise in this market is jeopardized by the Trump administration’s approach towards Chinese trade policy. President Trump’s chief trade advisor Peter Navarro, who hails from Southern California, has said that California “gets an advantage by simply facilitating the flow of illegally subsidized goods into the country. We are unique in that we are the gateway for the disease, and people make money off of that.”

Navarro and other economists argue that China’s government keeps the yuan artificially low—which is not accurate, as the yuan has actually appreciated during the last decade—and offloads cheap steel in the U.S. This position fails to properly consider the great benefits that our region receives from China.

According to the Rhodium Group, California serves as the primary gateway for goods passing between the U.S. and Asia, including nearly $150 billion in annual imports from China. Forty-four percent of trade volume at the Los Angeles and Long Beach ports comes from China, with more than 160,000 jobs at those ports sustained by this activity. Further, trade with China generates consistent job growth in distribution and warehousing, particularly in the Inland Empire, which added 56,000 logistics jobs from 2011-2016.

No U.S. state has attracted nearly as much attention from Chinese buyers as California, the site of nearly 40 percent of all Chinese home purchases in the U.S. Chinese buyers currently purchase close to $10 billion in residential homes in California annually.

Southern California is also a major destination for Chinese tourists, with Los Angeles attracting more than 1 million Chinese visitors last year, according to the L.A. Tourism & Convention Board. With the highest spending rates of any international visitors—$1.3 billion in 2015—Chinese tourists have driven employment growth in retail and hospitality. With only 6 percent of China’s population currently possessing a passport, we could be merely scratching the surface of Chinese investment in our market.  

Yet a U.S. trade war with China would destroy this momentum and, by extension, potentially send the entire Southern California real estate market into a tailspin. Therefore, trade tensions with China must be closely monitored as the most clear and present danger to the prosperity of our local real estate.

About the Author: Jason Schirn
As HPP’s Chief Investment Officer, Jason Schirn is responsible for HPP’s acquisition program in which the firm seeks to acquire approximately 1 million square feet of industrial real estate annually. Since 2010, Jason has played an instrumental role in the acquisition of more than 45 properties totaling over 4 million rentable square feet.