The commercial real estate industry has long been a major force in local and national politics, but that relationship has reached a new height on Tuesday, when a commercial real estate developer with little track record in public service won the election to be the 45th President of the United States. Aside from the choice of his economic advisors, what will a Trump presidency mean for the industry that created him? Here are some predictions.
A Risk of Recession Has Just Gone Up
This may not be a phenomenon exclusive to Donald Trump, but data collected over the past 70-plus years shows that whenever a new incumbent enters the Oval Office, a recession tends to follow within the first year of his administration, according to Victor Calanog, chief economist and senior vice president of research with New York City-based research firm Reis Inc. This is often due to the eagerness to implement fiscal policy changes in a hurried fashion, using “rather blunt instruments.” Given that the U.S. economic growth is currently far from robust and that Trump ran on promises of a number of economic changes—renegotiated trade deals, lower taxes and the like—the new administration will have to be extremely careful to avoid inadvertently bringing on a recession. “If the economic environment is fragile, which it is today, it may not take much to push our economy into a downturn,” Calanog said during a third quarter briefing on the state of the market. “President Trump has his work cut out from him.”
The Chances of a Fed Rate Hike in December Have Gone Down
While a strong jobs market and generally positive economic indicators made it likely that the Federal Reserve would raise its key interest rate in December, the election’s unexpected results may postpone the decision to hike rates, notes John Kevill, principal and managing director of U.S. capital markets with real estate services firm Avison Young. While previously the chance of a December increase was estimated at 85 percent, “consensus by traders already… is down to 25 percent,” Kevill writes. The interest rate will “probably move upward only one out of the next three meetings as opposed to all three…”
Short-Term Volatility in the CMBS Markets
As was made clear earlier this year, the CMBS markets don’t respond well to any perception of uncertainty in the general economy. At this point, it’s anyone’s guess what Trump’s economic policies may look like, says Greg MacKinnon, director of research with the Pension Real Estate Association (PREA). And that means more volatility is likely to be expected. “It’s really going to take a while to see how things will actually unfold,” MacKinnon notes. “In the short term, of course, that leads to uncertainty in the capital markets and I would not be surprised to see periods of volatility over the next couple of months as people come to grips with the election results. In the short term, capital market volatility could lead to a drop off in CMBS issuance from what it otherwise would have been through the end of the year.”
A Likely Pullback on New Construction
If the capital markets do experience a shock to the system, the difficulty of obtaining construction financing coupled with a muddy economic outlook may push some developers to abandon plans for new projects, MacKinnon adds.
A New Foreign Money Rush
While some investors may take a wait-and-see approach to betting their money on U.S. commercial real estate assets in the short term given the uncertainty surrounding U.S. economic policy under the new President Elect, “capital formation globally continues to grow and increase allocations to real estate,” according to Byron Carlock, real estate practice leader with consulting firm PwC, who is currently in London for an investment conference. Overall, “we will continue to be viewed as a safe haven and a popular investment destination,” he says. In fact, some foreign investors may expedite deals stateside in the coming months to protect against the possibility of potential barriers to foreign investment in the future, given all the anti-globalization talk during Trump’s campaign, noted MacKinnon.