Apr 7, 2025 7 min read

REITs Caught in the Trade War Crossfire

Why is the White House using tariffs? I believe the answer is actually pretty simple: Tariffs don’t require Congress. This isn’t about the best tool for the job. It is about bypassing Congress. No reason to overthink it.

Tariffs Are Coming

Several months ago, many investors believed that talk about tariffs was primarily a negotiating tool. Last week, it became clear that high tariffs were extremely likely to be implemented. Further, the tariffs would not be based on simply reflecting the tariffs the other country had on products manufactured in the United States. Instead, Tariffs would be based on how the gross dollar amount of physical goods the United States imports and exports to a country.

The Worst Explanation

If you’ve been following the announcements, you might have seen this (insanely complex) graphic, which the United States government called the basic approach:

That formula was designed to make it complex and it doesn’t even get to the actual tariff rate. You can safely disregard all of that.

The Actual Simple Version

We’re ignoring “services” and only focusing on “goods”. Why? Because that’s what the government did.

You can verify the numbers I use by looking at this post from the Office of the United States Trade Representative.

The United States exported $370.2 billion of goods to the EU in 2024.
The United States imported $605.8 billion of goods from the EU in 2024.
$605.8 - $370.2 = $235.6
Therefore, the trade deficit was $235.6 billion.of goods.

That was pretty easy right? One simple subtraction equation.

Now we need to find the new tariff rate:

We divide the deficit by the total amount of imports:

$235.6 / $605.8 = 38.89%

Once again, that was pretty easy.

Now there’s one more step. Multiply it by 0.5 (or divide by two, it’s the exact same math).

38.89% / 2 = 19.45%.

Congratulations, you’ve found the new “reciprocal tariff” for the EU.

Services

Excluding services from the calculation was pretty strange. The United States is not focused on manufacturing. Manufacturing goods is a low-margin industry. Services are generally higher margin. Software services are an extremely high-margin area.

Should we, as a country, really be so concerned by the gross dollar amount of the transaction? The United States sells less abroad, but the margins are better. Would you rather have higher sales or higher profits?

Impact on Equity REITs

The tariffs will have a negative impact on all equity REIT targets. Why? Because the odds of a near-term recession increased significantly and tariffs create long-term hurdles for economic growth. Every analyst will be placing negative adjustments on just about every stock, so it’s no surprise that all of our adjustments will be negative. The impact will vary by property type.

Utterly Unpredictable

Analysis is going to be particularly difficult due to the rapid rate of changes. Just this morning we heard that there may be a bonus 50% tariff on goods from China (potentially raising those tariffs to 104%). Good luck trying to model that out.

Brief Notes on Each Type of Equity REIT We Cover

Remember, every type of property will be negatively impacted. The primary question is the magnitude. Expect Q1 2025 earnings results to have far more negative revisions than typical quarterly earnings. We may see a few positive adjustments if the yield curve declines enough, but few REITs are sitting on that much floating-rate debt.

Industrial REITs: Largest impact. Industrial REITs deal with moving goods and those goods are impacted by tariffs.
Data center REITs: Difficult to project. Will foreign governments raise taxes on the kinds of services facilitated by data centers (such as artificial intelligence). Foreign countries could retaliate far more effectively by putting taxes on “service” fees from U.S. based companies.
Housing REITs: Moderate impact. On one hand, inflation (which is stimulated by tariffs) is generally seen as positive for housing because rents typically rise. On the other hand, recessions are bad for occupancy and renewal spreads. Tariffs could also materially increase construction costs. That further reduces new supply (which was already dropping). But higher costs to rebuild would also increase insurance costs, which are quite significant. The improving rent spreads due to lower supply is a positive factor for the sector and will significantly reduce the pressure on targets.
Tower REITs: I would expect the tariffs to have a much smaller impact here. Their tenants are the carriers. However, I’ve seen no evidence that carrier spending mimics retail customer spending, or that the carriers actually have the same priorities as their customers. Will carriers reduce their growth plans to focus on buybacks? Will higher prices for imported equipment reduce tower deployment? How easily could those things be overshadowed by carrier decisions on building new towers vs. leasing towers? The economics for carriers strongly favor leasing space on towers over building towers, but if the carriers always did the smart thing their 20-year charts wouldn’t look like train wrecks.
Net lease REITs: This sector is one that can benefit significantly from lower rates and from potential tenants wanting to sell real estate to raise cash. However, many tenants are industries that will be negatively impacted by tariffs. The very long duration on leases creates more certainty around future revenues and the triple net feature on leases means the elevated insurance costs are passed on to tenants. Overall, the impact on net lease REITs will probably be smaller.
Gaming REITs: Gambling (the primary form of “gaming” in these REITs) should be negatively impacted by a recession. However, it’s hard to say how that actually plays out. Sometimes people make decisions that are not rational.
Shopping Center REITs: My first impression is that the tariffs probably hurt the shopping center REITs more than they hurt the net lease REITs. However, we’ve been out-of-date on shopping center REITs for a long time because their valuations were so high above our targets that they wouldn’t be actionable anyway.
Cold Storage REITs: The bigger questions are what hammered occupancy so much over the last couple of years, how long will it last, and whether the consensus forecasts for growth are actually reasonable. Tariffs could be important here, but there’s going to be much more to unpack.
Biotech Lab REITs: The projected impact is difficult to quantify. Lower rates are positive for all REITs, but ARE has so much of their debt locked in that the benefit is smaller. A recession could be very negative for leasing space. Currently, leasing space is the biggest challenge because of extreme levels of new supply. The impact is magnified by the impact of reduced government support for research. On the other hand, tariffs impacting construction materials might further reduce new supply.

Brief Notes on Each Type of Equity REIT We Do Not Cover

We could skip these types since we don’t cover them. However, I suspect many of our members may have some exposure to these property types. Consequently, I’ll put together some very brief notes.

Office REITs: Big impact. The “return to office” culture was helping office REITs, but converting office into other property types was also helping. Higher import costs make those conversions more expensive.
Mall or Outlet REITs: I would classify it as severely negative. A huge portion of their tenants are selling imported junk. I’m not convinced the tenants can pass the entire tariff on to retail customers.
Storage REITs: An analyst covering these REITs should be looking into what happened in the Great Recession to estimate how well they can withstand recessionary impacts. Storage REITs might see positive impacts from a recession because people are forced to “downsize” and may often end up buying a storage locker.
Medical Office REITs: No guess about the magnitude of impacts.
Healthcare REITs: Diverse group. Hard to quantify impact. We decided not to cover them a long time ago because a deep look into the business models for several made us wary of the property type.
Hotel REITs: Big nasty impact. Many of these REITs carry too much leverage also. One of our major reasons for refusing to cover hotel REITs is because their fundamentals (driven by occupancy) take a big hit during recessions. That’s a problem. We prefer REITs that are more resilient against recessions. Everything goes down, but we prefer ones that are less likely to be crippled. If we see a real recession, some of the highly-leveraged hotel REITs could go to $0.
Diversified REITs: By their nature of being diversified, we can’t just lump them together for impacts. An analyst or investor would need to go one by one.
Farmland REITs: Seems severely negative to me. Expect tariffs to hit the stuff our farms are exporting. That’s bad for tenants. However, we may see government subsidies to prop up farms. Will they rotate their crops based on which items become profitable domestically? Ask a farmer. I don’t know.
Billboard REITs: Don’t know. I’ve been concerned about the long-term headwind from self-driving cars. Tesla’s self-driving feature doesn’t impress me. LIDAR systems are vastly better, though they are much more expensive. I’m inclined to think a LIDAR system can drive better than I can. Billboards only work if people are looking out the windows. Anyone who can afford a self-driving car can afford a Meta Quest 3, or whatever the latest version is when self-driving actually becomes viable. Will we have regulations requiring drivers to keep their eyes on the road? That makes sense with Tesla’s “self-driving”, but it isn’t necessary with LIDAR. On one hand, you have advocates for “safety”. On the other you have Meta and Apple producing VR headsets that would benefit from much higher demand if they can be used on the road. I’m inclined to think Congress will go with the side that spends more on bribes. Or “lobbying” as it is officially named.
Cannabis REITs: The tiny one, Power REIT (PW) might go bankrupt. That was already a risk. I blasted their management years ago. They had an incredible rally at one point, but eventually they cratered. The big one, Innovative Industrial Properties (IIPR), is hard to forecast. Bad name for a cannabis REIT. I wrote on IIPR years ago. I consider it uninvestable because of the regulatory risk. If there is any regulation that substantially helps or harms it, that information will be sold by Congress to hedge funds long before we would find out about it. That means retail investors (and analysts who are not connected to Congress) are at a disadvantage. That makes it off limits for me.

Conclusion

We will be sending out our target updates for equity REITs to our paid members shortly. Most of the equity REITs we cover will be included.