The Trans-Pacific Partnership (TPP), if ratified, will significantly impact economies around the Pacific Rim, with corresponding effects in commercial real estate markets. The industrial and logistics property sector will likely reap the most benefit from the agreement thanks to increased trade flows.
The TPP is a large regional trade deal that was negotiated between 12 Pacific Rim countries. Trade agreements are important to real estate markets because they facilitate the exchange of goods and services. In addition, such agreements can potentially alter where goods and services are produced and raise incomes. If ratified, the TPP will significantly impact economies around the Pacific Rim, with corresponding effects in property markets.
Countries that make up the TPP—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam—account for 20% of global trade and 40% of global GDP. These facts, in addition to the possibility that other countries may join the TPP, make the deal globally relevant and especially important in East Asia. In terms of scope, the TPP goes beyond reducing traditional trade barriers and addresses other issues, like unfair competition from state-owned enterprises, customs practices, intellectual property rights, transparency, and labor and environmental standards.
Looking at property types, the clearest winner from the TPP will be industrial and logistics real estate as trade flows increase. Industrial markets in Canada, Japan, Malaysia, Mexico, the U.S. and Vietnam should all experience notable gains. Office markets in the U.S. and Japan will benefit from higher demand for services that are exported or utilized for trade. Retail markets in countries with large income gains—like Malaysia and Vietnam—will see the most notable impacts.
The effects of the TPP will extend far beyond the Pacific Rim. Should the deal be ratified, it will shape future trade negotiations and liberalization, and will influence demand for space across the region’s property markets for quite some time. Long-term investors should take note that the trade ministers from these 12 countries—in quite a literal sense—have negotiated not just a trade deal, but also changes in property markets.
In October 2015, trade ministers concluded negotiations on the Trans-Pacific Partnership (TPP)—a large regional trade deal that includes 12 countries located around the Pacific Rim. If ratified, the economies of the 12 participants stand to make gains, but will evolve in different ways, in line with their varying comparative advantages. Consequently, the TPP’s real estate impact will be most apparent at the sector level, although a broader uplift in income should generally support residential and retail values.
The TPP addresses a broad range of issues that are important to developed and developing economies alike. This regional trade deal goes beyond lowering tariffs and traditional barriers to trade and focuses on reforms that will address non-tariff measures that impede trade.2 Such reforms include easing protections on state-owned enterprises, streamlining customs, increasing the protection of intellectual property rights, providing transparency in business laws and setting labor and environmental standards.
HOW TRADE AFFECTS COMMERCIAL REAL ESTATE
Trade agreements shape economies in the longer term by altering the kinds of goods and services produced and raising per capita incomes. Consequently, the sources of demand for commercial real estate change. This, in turn, affects the growth potential for property types in different markets.
Liberalization of trade also influences investment flows. For example, envision a company opening a new operation in a foreign country where a recent trade agreement has created the opportunity to manufacture its products at a lower cost. As well as specific demand for industrial real estate, the communities in which this investment takes place would enjoy the positive effects of money flowing into their economies. The positive economic impact of new investment and wages ultimately translates into higher fundamental demand for commercial and residential real estate. Improved fundamentals could also lead to further investment flows as international real estate investors begin to acquire stock.
Mexico’s auto sector is a prime example of how investment flows and certain sectors in an economy can be affected by trade agreements, with corresponding effects in commercial real estate markets. The North American Free Trade Agreement (NAFTA) was an important catalyst for Mexico’s auto industry. During the first 20 years of NAFTA, vehicle production in Mexico more than tripled.3 Following these successes, trade liberalization in Mexico didn’t stop with NAFTA. By 2012, Mexico had free trade agreements with 44 countries and, during the same year, Mexico exported 83% of its light vehicle production and was the fourth-largest exporter of motor vehicles in the world, behind Germany, Japan and South Korea.4 This did not happen by chance.
To be sure, low production costs are a key factor in decisions leading to auto production in Mexico. However, auto executives also cite Mexico’s trade deals as a major factor in their decision-making process that lead to expanding operations in the country.5 This has been the case for not only North American auto manufacturers, but also Japanese and European automakers—which, in 2007, surpassed North American automakers as the largest producers of autos in Mexico. In fact, European and Japanese automakers accounted for 60% of Mexican auto output in 2014.
Data show that employment in the manufacturing of transport equipment in Mexico has grown by nearly 60% between 2007 and 2015, and is responsible for the employment of nearly 800,000 workers.6 Growth in the sector is expected to continue, with Mexican officials recently estimating automakers and suppliers were poised to invest an additional $20 billion in the country.
How has this affected commercial real estate? In short, the growth in Mexico’s auto industry caused new markets to form and existing markets to grow. Due to the absence of commercial infrastructure on the scale required for new manufacturing operations, automakers pursued build-to-suit strategies, often in sparsely developed areas.
In the Bajio region of Mexico—located northeast of the capital city—auto sector growth has fueled tremendous growth in the commercial real estate market. This growth—which also fueled the region’s broader economy—generated demand across property types. Since 2012, Bajio industrial stock increased by almost 80% to 7.6 million sq.m. (roughly 81.8 million sq. ft.). Retail stock in the region increased by over 38% to 2.3 million sq.m. (roughly 24.8 million sq. ft.) and office stock increased by 45% to just over 227,000 sq.m. (roughly 2.4 million sq. ft.) during the same period. In summary, auto sector growth in Mexico—supported by free trade agreements—generated demand for real estate across property types.
The TPP has come about during an important time with regard to the future of global trade and economic prosperity. With the successful conclusion of TPP negotiations, if ratified, the deal will have a significant effect on commercial real estate markets in participating countries. Long-term investors would be advised to pay careful attention to the forecast economic changes. Beyond the TPP, its influence on future trade deals and regional dynamics will play an even larger role in the evolution of commercial property markets.
OFFICE MARKETS TO WATCH
Office markets in the U.S. will benefit from increasing service exports (for example, financial services, consulting, engineering, software design, etc.). The full effects of the trade deal will be somewhat dispersed as many service exports are easily enabled by technology. However, office markets in cities such as Los Angeles, San Francisco, Seattle, New York and Washington, D.C., are all well positioned to see benefits. West Coast office markets are likely to see some of the most notable gains from the TPP due to geographic proximity, existing trade ties and sizeable presence of key service industries.
Value-added gains are notable for Japanese services and will bolster demand for office space. Tokyo’s office market is expected to capture the largest share of TPP gains due to its preponderance of large multi-national firms and trade ties. Still, other markets with strong trade ties, such as Osaka, can expect to see benefits from the deal. The TPP is expected to increase Tokyo office demand by over 3.7 million sq.m. (almost 39.8 million sq. ft.) by 2030, provided the deal is ratified in the near term.
INDUSTRIAL MARKETS TO WATCH
As a result of the TPP, imports and exports of goods are expected to increase notably in Canada. Such activity will support demand for both manufacturing and warehouse/distribution product. Areas with a large manufacturing presence—such as Montreal, Toronto, Winnipeg and markets in southwestern Ontario—are likely to see increased demand for space as a result of expected gains in durable goods exports. In Western Canada, demand for warehouse/distribution space in Vancouver and Calgary will be supported by increasing trade volumes with TPP countries.
In nominal terms, the land of the rising sun will see the largest manufacturing value-added gains. These increases will be concentrated in the production of transport equipment and machinery. Due to the fact that Japanese manufacturing is heavily reliant on imported raw materials, the implications of manufacturing gains for warehouse and distribution product should be considered. As such, the country’s five largest port cities—Tokyo, Yokohama, Nagoya, Osaka and Kobe—are well positioned to benefit from the TPP.10
The TPP will provide a powerful boost to manufacturing in Malaysia. Production of electrical equipment and machinery will see large gains under the deal. Similar to other areas, demand for warehouse and distribution product will also be supported by increasing levels of manufacturing.
Manufacturing value-added gains in Mexico are smaller and concentrated in the production of durable goods. Gains in the manufacturing of machinery and transport equipment are expected to be the largest, with smaller gains in electrical equipment and chemicals. The TPP will support continued growth in Mexico’s burgeoning auto sector. Consequently, areas with exposure to Mexico’s auto industry are expected to benefit.
Generally speaking, lower-cost locations will see increases in manufacturing as a result of the TPP. In the U.S., warehouse and distribution product will be most affected due to an expected increase in imports. Most imported goods from Asia arrive in the U.S. through West Coast ports.11 Consequently, markets such as Los Angeles/Inland Empire, Oakland and Seattle—among other West Coast ports—are expected to see increasing demand for warehouse and distribution space.
Industrial markets in Vietnam will be some of the biggest winners from the TPP. This is due to the enormous upside growth potential as a low-cost producer—particularly of textiles and apparel—for large developed markets, especially the U.S. In fact, looking at manufacturing, value-added trade in gains in nominal terms are behind only Japan and Malaysia despite being a much smaller economy. This will bolster both manufacturing product and warehouse distribution product that will support increasing production.
RETAIL MARKETS TO WATCH
Income gains in Vietnam will be substantial. In nominal terms, Vietnam impressively ranks fourth in gains behind the U.S., Japan and Malaysia. Growth spurred by the TPP will benefit workers and increase demand for retail.
Projected income gains in Malaysia are notable (in nominal terms behind just the U.S. and Japan). These large gains will provide consumers with a greater capacity to spend, which will be reflected in retail commercial real estate markets.
Due to the large size of its economy, the TPP’s effects on Japanese retail will likely be more dispersed. Still, in nominal terms, Japan’s income gains will be second only to the U.S. The TPP’s impact on Japan is substantial on many levels and is expected to be a significant boost to the country’s economy, supporting increasing levels of consumption.
By Richard Barkham, Global Chief Economist, CBRE, and Darin Mellott, Director, Research and Analysis, U.S. Southwest Region, CBRE.
View the full report ‘Negotiating the future of property markets: The TPP and commercial real estate’ here.