Mark Bonner: 00:09

Okay. Welcome to First Draft Live. It's Friday, August 1, and we're coming to you live on what some are already calling Liberation Day part three. I'm your host, Mark Bonner, BizNows editor in chief, coming to you live from New York. Thanks for tuning in from all across the country and around the world.

Mark Bonner: 00:25

Really appreciate your time. Overnight, maybe you saw this news. The White House made a stunning pivot just before his self imposed deadline. President Donald Trump signed an executive order extending tariff negotiations for seven more days. That gives nearly 70 countries one final shot to cut a deal or face sweeping new import taxes ranging from 15 to 41% starting next Thursday.

Mark Bonner: 00:50

The move marks a definitive break from decades of free trade consensus. The US is now in a full blown protectionist era. The fallout, market shock, the Dow is down more than 500 points this morning. Global recap recalibration and for commercial real estate, some very real implications. Steel and aluminum tariffs are being locked at 50%.

Mark Bonner: 01:15

That's keeping development costs roughly 10% higher. Copper tariffs are also kicking in. Pharmaceuticals and semiconductors, they're next in line. Canada is facing 35%. Switzerland, 39%.

Mark Bonner: 01:29

Brazil, 50. Even close allies like South Korea had to scramble the Inca last minute deal. Meanwhile, the European Union managed to secure a deal earlier this week, capping tariffs on most goods at 15% instead of the threatened 30. They were originally in single digits. They are now no longer.

Mark Bonner: 01:48

And while the Dow continues to hit record highs over the last few months, today being the exception, beneath the surface, this tariff regime is quietly redrawing winners and losers. Big tech and financials are gaining ground with investors, while CRE everyday consumers like you and me, energy, and health care are getting the short end of the trade stick. So is CRE heading deeper into uncertainty with sourcing bottlenecks, capital dislocation, and inflation threats lurking just off stage? Can US protectionism be priced in or will volatility continue to reign? To help make a cent help us make sense of it all, we're joined by someone who's been tracking it from the front line since day one.

Mark Bonner: 02:34

James Bonacre, senior economist at Cushman and Wakefield, a veteran of S and P Global, c r CBRE and Moody's. James, welcome to the show. I know you're calling us from Boston.

James Bohnaker: 02:47

Yeah. Glad to be here, Mark. Thanks for having me.

Mark Bonner: 02:49

Look, man. You've picked one hell of a week to show up on this show, so we really appreciate you. Let's just start right at the beginning. What was supposed to be a hardline deadline today became something different. A pivotal pivot, if you will.

Mark Bonner: 03:06

Trump's executive order gave nearly 70 nations until August 7 to secure trade agreements. I know for a lot of players on the ground across The United States and in Europe where we have so many of our audience coming in today, they may think, oh, that's happening somewhere else. That's not affecting my world. What do you think is most consequential for CRE right now given the news of the last twenty four hours?

James Bohnaker: 03:27

Well, I think it's a continuation of what we've become accustomed to in this administration in Trump's second term, right, which is just unpredictability on a policy front, primarily as it relates to trade and tariffs. And the initial shock obviously rocked markets back on April 2. And we've just had a constant stream of changes to policy and not knowing what's coming next. So I think that's really the biggest thing right now. We still don't have a lot of clarity as far as policy goes.

James Bohnaker: 04:02

And I think at the end of the day, while some of these trade negotiations have been favorable in terms of just the tariff rate coming down from a worst case scenario, there's been other countries that have been worse off than we expected. And I think just big picture, taking a step back where we are today, the effective tariff rate in The US, which essentially combines all these different rates on countries and products, it's still about 10 percentage points higher today than it was heading into this year. And so that's consequential. That's a cost increase that businesses, consumers, developers are going to have to pay. And it's going to take time for that to shake out.

James Bohnaker: 04:42

And that's really the big question mark for me are the implications to The US economy, to financial markets, construction costs, all of those things. And it takes time to work itself through the supply chain. And so I think we're still very much in that period where not only do we have the tariff policy uncertainty, but you're also starting to see some of this spill into the economic data, right? Like, so we got a jobs report this morning, 73,000 jobs for the month of July, not great. And if you look back over the prior months, we had some significant downward revision.

James Bohnaker: 05:17

So economy is clearly slowing, economy is clearly slowing, policies unpredictable. And then you talk about the Fed too on the monetary policy side of things, that puts them in a jam. So I don't think there's a lot of clarity out there. There is good news, though. And I think heading into this year and still over the course of the first half, we've seen a lot of resilience across commercial real estate, whether you're looking at leasing fundamentals.

James Bohnaker: 05:44

We're seeing improvement in debt markets, equity. So there's some green shoots out there and I think this recovery has some resilience, has some momentum, notwithstanding some of the macro risk that's out there.

Mark Bonner: 05:58

So look, there's been a lot of doom and gloom headlines on the macroeconomic agenda that that is that that The US has been trying to face. There's been a lot of geopolitical issues. You talked about the Fed. The Fed held, they're probably not gonna lower rates in September, although it's probably a jump ball. Most economists say that that interest rates probably won't start coming down in December, probably going to Q one twenty six.

Mark Bonner: 06:19

I mean, you're talking about these green shoots. We've been covering this for months. You are correct. So, how do you make sense of the macroeconomic noise which a lot of people say is doom and gloom and scary. The jobs report didn't come in as strong as we had hoped.

Mark Bonner: 06:34

Why are these green shoots sprouting? How is this possible?

James Bohnaker: 06:37

Well, I think you have to consider, go back a few years, commercial real estate's been in a slump many regards for a while now. Things were going pretty well for the better part of 2022 until we got the ramp up, significant ramp up in interest rates. Right. And being such an interest sensitive sector, we really saw the capital markets ground to a halt. A lot of uncertainty around the office market with obsolescence and more distress coming online.

James Bohnaker: 07:10

And so we're kind of well into the slump and the recovery had already started, right? Even if you look across the office sector, there's some absolute green shoots there that we're seeing. And so real estate has kind of already been through its bumpy period. And so I think that with the backdrop of a mostly resilient economy, most of that softness that we've seen in our sector has kind of been worked its way through the system. Right.

James Bohnaker: 07:39

And so I think there's just a ton of capital on the sidelines, both domestically and foreign, that's been parked there for a couple of years now. And so I think there's just that urgency to get back in the marketplace. Remember, real estate is mostly a long term investment, right? And I think we're very clearly in many regards kind of at the bottom of the cycle or even a bit beyond it. And now looks like a really compelling time to make those investments in commercial real estate from a number of different angles.

James Bohnaker: 08:11

And so I think the fundamentals for real estate look a little bit better than kind of just looking at the overall macro economy right now.

Mark Bonner: 08:21

Just getting back to tariffs just for a second. You know, steel and aluminum are still taxed at 50% as of today. That's keeping development costs elevated by 10% or more. You and I were talking about copper levies earlier. That came in a little lighter than feared.

Mark Bonner: 08:34

That triggered a plunge in prices after markets had overcorrected. Are developers still in freeze mode today, or are they gonna begin or can they now begin to model these new scenarios based on fixed rates and these friendlier trade corridors?

James Bohnaker: 08:53

Yeah. So we've been modeling this very closely. So just to give you a sense, I know you referenced the 10% increase due to tariffs. By our estimation, we're looking at materials costs based on the tariffs that are in place today that are about 6% to 7% higher on an aggregate basis across commercial real estate projects just for the materials. So if you kind of assume that labor is what it is, no changes there, we're only estimating that the project costs are up about 3% to 4% in terms of the exclusive impact from tariffs.

James Bohnaker: 09:28

So that being said, it's maybe not as bad as some other estimates out there or you might expect just given those 50% tariffs. So that's one thing. I think that the costs aren't increasing as much as could be expected. But to answer your question, I think it's ultimately a little bit of both. And it kind of runs the spectrum, right?

James Bohnaker: 09:50

So we've got a development environment, which if you look at multifamily, industrial, of course, the office market, retail construction has been subdued for years now. So all of these sectors, we're seeing really soft activity, right? Not just because of interest rates, but because of market conditions, too. And so, you know, I think there is a sense that developers would like to mitigate the cost pass through that they pass on to their customers. But that's going to be some of it.

James Bohnaker: 10:23

But the reality is that, you know, these costs increase, given what we've seen over the past number of years, right? It's not like construction costs that went up dramatically in 'twenty one and 'twenty two. It's not like they've come down. So these are just additional costs in an already tight market in terms of turning a profit on new developments. And so I think to some extent, we'll see projects paused or perhaps scrapped altogether.

James Bohnaker: 10:52

But that's probably the exception rather than the rule right now. Think that for the most part, developers, for projects that are already underway are going to try to make that work. But it is a very tight operating environment right now. And we're just not seeing a lot of new development. And I don't think that we really break out of a slump here anytime in the next couple of months.

James Bohnaker: 11:14

I think that's probably more of a 2026 recovery period.

Mark Bonner: 11:19

Right. I mean, this was supposed to be the year where all that sideline capital was then going to reenter the playing field coming off of the pandemic and everything that happened during that period of time. Yet, talk about green shoots, CRE finance council sentiment index jumped 28% in Q2. That's one of the sharpest quarterly rebounds on record. Borrowers are back.

Mark Bonner: 11:40

Lenders are cautiously leaning in and Trump's tariff clarity. However, aggressive and however bad this may make Europe feel or other countries around the world, it may be helping the market to price risk. The big question and you kind of touched on in 2026 is like when exactly will the sideline capital finally reenter the series stack and what will it take to get that sideline capital to get off of the sidelines more aggressively?

James Bohnaker: 12:10

Yeah, well, I think some of the wheels are already in motion here, right? I think most importantly, from a lending perspective, the debt markets are coming back. And that's obviously crucial for the majority of real estate transactions, whether you're talking about existing properties or secondarily new construction. And so lending standards, by and large, have been easing for well over a year now, very gradually, right, at a very measured pace. So if you look at credit spreads for the CMBS market, for example, those are fairly tight compared to where we were a year, two years ago.

James Bohnaker: 12:47

If you look at short term loan to value ratios, I should say, those have been fairly conservative, right? At the same time, we've also seen a pricing adjustment, right? Commercial real estate values are well down from the peak several years ago. And so all of the stars are kind of aligning. And it's just taken some time for that to happen.

James Bohnaker: 13:08

I think, you know, from an interest rate perspective, we've all been kind of waited with bated breath for lower interest rates. And that will help, too. I think there certainly are some question marks about whether the Fed cuts in September or not. I think at this point, probably more likely that we are leaning into a lower rate environment than one in which rates are going to be higher. But even that's kind of kind of a question mark.

James Bohnaker: 13:34

And so I think, you know, and meanwhile, the backdrop is that fundamentals across most property sectors are pretty resilient, pretty healthy right now, notwithstanding, you know, some temporary softness in the industrial market and perhaps in retail a little bit. But there's a lot to like out there. And so I think that, you know, once we enter a lower rate environment, that's going to help. And the debt markets have been really crucial. I think that equity is slowly starting to come back, right?

James Bohnaker: 14:06

You're seeing institutional capital start to lean in a little bit more. As I mentioned, I think anytime you have this sort of significant dislocation in terms of pricing, again, thinking about the longer term, there's some very compelling reasons to believe that things will turn up again. So right now, I really think it is the macro uncertainty, the policy uncertainty that's kind of just keeping things from a stronger recovery. But we're moving in the right direction. You know, transactions are up on a trailing twelve month basis, 15%.

James Bohnaker: 14:42

So so we're moving in the right direction. And I think we'll see that continue throughout this year and especially into into next.

Mark Bonner: 14:49

Yeah. Look. I mean, the chaos theory has been deeply at play under the Trump administration. You know, the policy whipsaws from one side to the other. That's unpredictable.

Mark Bonner: 14:57

And banks don't like that. So James, let me just ask you here. I mean, you're an underwriter adjusting a loan term, how do you bake in US policy risk? And what I mean by risk is that that's not a comment on whether it's the right policy or not. It's a comment on the policy changing so rapidly day to day, week to week, just like it did in the last twenty four hours.

Mark Bonner: 15:18

How underwriters bake that in?

James Bohnaker: 15:21

Yeah. I mean, the way that I think about it is just given the heightened level of uncertainty that we have from every angle right now, I think scenario planning is crucial. Anyone who says they have a highly confident view of how the economy is going to perform or how real estate markets are going to perform or where interest rates are going to be, I think that's I'm skeptical of that, right, because there's just so many different outcomes that can play out. I mean, just take tariffs, for example. We have never entered.

James Bohnaker: 15:55

We've never had this type of policy in the modern U. S. Economy where tariff rates are what they are. And so there's not really a lot to base it off of in terms of modeling what the outcomes are going to be for any of those variables that I mentioned. And so I think scenario planning is crucial.

James Bohnaker: 16:12

And I think on the margin, you know, whenever you have these kind of tail risks that, you know, is going to lead lenders to be somewhat more cautious. And so, you know, while we have seen significantly more interest from banks in terms of CRE lending, especially the top 25 banks in The United States, While there is more, you know, they're more eager to get back into commercial real estate markets, I think, you know, if the economy starts to turn south and financial markets get volatile, remember, it's that's a bigger it's a bigger problem. And so could kind of slow things down here from a liquidity standpoint. Now, I don't expect we at Cushman Wakefield don't expect a severe recession. We all know that the economy at this point is slowing down, but that was expected to happen anyway in 2025.

James Bohnaker: 17:06

And so I think things continue to keep moving in the right direction from a lending perspective, especially with the banks and life codes. We've also seen private debt funds really ramp up their activity in terms of lending. That's become very competitive and is now about 20% of the lending pool, up from 11% pre rate hiking cycle. So there's a of debt out there, and it's become more competitive. And so I think at the end of the day, barring a severe recession, which at this point seems like a low probability event, things are going to keep gaining some traction in the capital markets.

Mark Bonner: 17:48

You're just tuning in, it's Tariff Week Liberation Day Part three, and we're breaking down how the new global trade order could reshape commercial real estate. With us is James Bonacre of Cushman and Wakefield. James, let's go to a couple of questions from our audience. Yep. Do you you have an idea about the effects of immigration policy on the cost of construction?

James Bohnaker: 18:09

That is a great question. I have some theoretical ideas. Were going to focus on tariffs today, why not turn to some more policy risk? So we've already seen, I'll just say, as I think most people know, we've already seen immigration into The United States slow down dramatically in 2025 and even toward the end of last year. And the foreign born workforce in The United States accounted for essentially all of the labor force growth over the previous two years.

James Bohnaker: 18:39

And so with that material pullback layered on top of that, you know, some of the deportations we've seen and, you know, kind of fear factor of, you know, hearing about people not going to work or to school or whatever because of, you know, concerns over that. I think all those things together is going be very impactful for construction costs. I don't have a quantitative estimate for you right now, but, you know, in the construction sector, I think it's about 10% of the workforce is undocumented. And then a much larger portion of the workforce is, you know, obviously foreign born legal immigrants. And so, you know, both of those things are likely to put upward pressure on wages.

James Bohnaker: 19:23

And, you know, right now it's not as big of a factor because there's just not a ton of construction activity, whether we're talking about commercial or resi. But, you know, once we get to a point in the cycle where, you know, construction is picking up, I think there's there's a good potential to run into labor shortages and, of course, higher cost pass throughs. So, you know, that's something that that we're going to have to grapple with as far as the impacts once we see how the how the how immigration and the labor force plays out.

Mark Bonner: 19:56

Another question from the audience. What's the probability of a, quote, unquote, big bang of new investment into CRE versus a continuation of the, quote, unquote, low long, slow grind we're current currently experiencing, James?

James Bohnaker: 20:11

Yeah, I think it's hard to say. I think right now it's very difficult for me to say there's going to be a big bang of investment activity. I think we could see it kind of come in fits and starts in that in that manner. Right. You know, the market sentiment right now appears to be gaining momentum.

James Bohnaker: 20:32

I think that, I mean, one thing that could could really boost things is, you know, maybe a big Fed rate cut. Maybe one day President Trump walks into the Oval Office and signs an executive order that all tariffs are back to zero. Something like that. But I think, you know, barring those kind of events, I think we're more or less in this slow grind period. 2026 is anyone's guess.

James Bohnaker: 21:01

I think we definitely see more substantial activity once we get to next year. Right now, we're just kind of in that period where there's being a a lot kind of thrown at us from from a policy uncertainty standpoint. So right now, I think more of a slow grind.

Mark Bonner: 21:19

Yeah. I mean, look, and there's been a lot of speculation about a tariff induced recession. Right? And if that were to come to pass, James, I mean, just play ball with me for a second. What sectors of commercial real estate do you think would be most affected by that?

Mark Bonner: 21:32

Retail? Office?

James Bohnaker: 21:35

Yeah, I mean, I think it, you know, the obvious answers are industrial retail. I think that, you know, while the end goal, at least one of them of the tariff policies is to bring, manufacturing and industrial activity back to The US. And there have been some commitments for investments in The United States in certain isolated regions and sectors. But if you kind of look at manufacturing activity year to date, we've seen 28,000 job losses. Manufacturing activity overall has been contracting for five months.

James Bohnaker: 22:14

And so I think there really is a lot of concern there within that sector just with less imports expected to come in. We've already seen that fall off. And so your coastal port markets may see somewhat less activity. And we may see some geographical shifts there as far as which regions of the country benefit and which ones kind of struggle a little bit more. And then retail, I think we had already seen a lot of evolution over the past year.

James Bohnaker: 22:46

2024, we saw several high profile bankruptcies, which of course were unrelated to tariffs or anything. But that's working its way onto the market. And that's going be a challenge for retailers. Consumers are stretched pretty thin right now.

Mark Bonner: 23:03

And I

James Bohnaker: 23:03

think something has to give. You kind of have to pass those costs along or look to cut costs elsewhere. And so I think those two sectors are most directly in the crosshairs right now.

Mark Bonner: 23:18

It seems like institutional capital, though, is making some moves lately, right? Pensions, sovereigns, credit funds are reengaging, especially in assets linked to AI or renewables and, you know, stable long term demand. Risk committees are demanding flexibility. Shorter hold periods, broader force majeure clauses and supply chain diversification. James, in your opinion, is tariff sensitivity now a required line in the capital stack model?

James Bohnaker: 23:44

Well, I don't know if I would say required. I think it's the smart way to go about it. Because right now, as I mentioned, real estate's been through its lumps over the past number of years. I think that all this capital has been sitting on the sidelines kind of theoretically evaluating portfolio strategies and now is kind of ready to get out and actually deploy that, only to kind of have these new risk factors layered on top of it. And those things are always going to be there.

James Bohnaker: 24:16

But I think, again, it just falls under that macro risk bucket, whether you're talking about geopolitics or interest rate risk or economic risk. And so think that's, again, the scenario planning is always prudent. And I think what we're going to see and we already have been seeing, right, is a focus on income resiliency from an NOI perspective, right? We're not likely to see a lot of capital appreciation through pricing, at least in the near term. Right?

James Bohnaker: 24:50

So I think those sectors, you know, residential, AI, things that have structural kind of tailwinds are most going to be in favor and most resilient to kind of whatever is thrown at us from a macro sense because it's just so hard to predict. I think it's very hard to make a play based purely on the macro unless you're thinking about it longer term, right? What are going to be the structural forces driving the economy, driving real estate markets over the longer term?

Mark Bonner: 25:25

I know you look at a lot of data, James, and I'm sure you've been studying the last six months in particular about everything that's happening economically in the country. What concerns you the most when you're looking at the numbers that maybe people like me can't see because we don't have the same skill set or the same eyes that you have? What concerns you?

James Bohnaker: 25:45

I I've I've got a long list, but I I think

Mark Bonner: 25:49

We've got a few minutes. Let's get into it.

James Bohnaker: 25:51

Well, mean, I'll just mention one thing. And it's because it's such an important factor for the economy, and that's consumer spending. The consumer has been so resilient over the past few years. There's been calls that debt levels are rising and this is going to be the moment inflation, obviously, this is going to be the moment when consumers finally pull back. And I think if you you look at consumer spending overall, so for example, in the second quarter of this year, it was grew 1.4 after adjusting for inflation.

James Bohnaker: 26:29

So, you know, not declining by any means, but for context, it was double that in 2024, 2.8%. And consumer spending is 70% of the economy. And if you think about how many parts of real estate that impacts, right, there's retail, entertainment, mixed use, industrial with e commerce. So that's really, I think, the thing that I'm most closely watching. We got a reading on consumer sentiment this morning.

James Bohnaker: 27:00

Still pretty weak. And of course, sentiment doesn't always translate into spending, but it may starting to be. So we've seen a very clear slowdown there. And then furthermore, if you kind of look across the income distribution, there's a big chunk of consumers that do have high debt loads and their wage growth is slowing. And perhaps we're starting to see a more difficult job market.

James Bohnaker: 27:25

So kind of the big thing for me is just monitoring the consumer.

Mark Bonner: 27:30

Yeah, you bring up and look, today was not a good day for the consumer. No. And so, you know, and you're right. There's a big difference between sentiment and what a consumer actually does. The sentiment has been negative for the last twenty four months, but the data has shown that to your point, that consumers have been incredibly resilient, willing to spend money on all sorts of things.

Mark Bonner: 27:52

If and when that changes, I think you're right that that is something that that should be very concerning for the commercial real estate industry. We're running a little low on on time, James, but I did want to get to one final question from the audience. In your opinion, how is the chaos in US policy affecting overseas investment into The United States as far as commercial real estate?

James Bohnaker: 28:15

It's hard to say with a broad brush. My sense is that investment or interest in investment into The United States is very strong, perhaps even stronger. I think that it all kind of goes back to the sense that The US is the largest market in the world, the most stable. At the end of the day, the dollar, in my opinion, is not at risk of losing its reserve currency status, at least anytime soon. So I think anytime there's volatility globally, investors naturally look to The United States because of those democratic system of government, reserve currency, and generally just better economic performance, less volatility compared to other parts of the world.

James Bohnaker: 29:06

And so I think this time is no different. Yes, on the margin, there might be certain investors in parts of the world that say, hey, I'm staying away just because of all that volatility. But I think by and large, investors realize that there's a tremendous amount of opportunity here and have confidence in The United States.

Mark Bonner: 29:29

James, thank you so much for being here today.

James Bohnaker: 29:32

Absolutely, my pleasure. Great talking to you, Mark.

Mark Bonner: 29:36

Alright, that's it for this week's edition of First Draft Live. We'll be back next week with more from the front lines of commercial real estate. You can subscribe to this show wherever you get your podcast and you can find every episode on biznow.com. I'm Mark Bonner. This is First Draft Live.

Mark Bonner: 29:52

Have a great weekend y'all.