Trump Presidency Commercial real estate translation

In November, the Republican Party gained control of the White House and retained majorities in the House of Representatives and the Senate. President-elect Donald Trump assumes office on Jan. 20, and through his campaign platform and post-election statements we have a basis to anticipate his policy priorities and their potential impact on the economy and commercial real estate.

Potential CRE Implications

Office

  • Reduced regulation—and potentially greater economic growth due to tax cuts and higher spending—would benefit several large office-occupying industries.
  • Increased defense spending would benefit markets with heavy concentrations of defense-industry companies.
  • Significant changes to Dodd-Frank could boost office demand from the banking sector in the long term.
  • Unknown but anticipated changes to Obamacare could have short-term negative impact on medical office demand.
  • More restrictive immigration policy could constrain the available skilled-worker pool, particularly impacting the tech industry and its demand for office space.

Industrial

  • Import-driven industrial markets and assets need to be watched given the likely more protectionist stance of Trump’s trade policy. A protectionist trade stance could negatively impact imports, which are a better indicator of industrial space demand than exports.
  • Given the historically tight occupancy conditions in industrial markets, a modest softening would have only limited impact. A short-term slowdown in demand may give the supply side room to grow and, over the medium term, give users more options.
  • There is potential for a strong positive impact on direct-to-consumer (last-mile) industrial dynamics, as stronger overall economic growth would boost consumer demand.
  • Retail
  • We foresee a net benefit as faster economic growth from fiscal stimulus could improve consumer confidence and spending, and a stronger dollar should further increase buying power.
  • There could be a neutral-to-negative impact on the luxury segment with increased domestic demand counterbalanced by decreased foreign demand due to a stronger dollar.
  • In the near term, real wage growth will drive consumption and retail sales. Tax cuts, if enacted, could aid this growth.
  • More restrictive immigration policy may affect labor supply and costs for retailers and restaurants.

Multifamily

  • Less regulation on financial institutions could make home mortgage lending easier, benefitting the single-family home industry.
  • On the other hand, higher interest rates associated with more expansionary fiscal policy and inflation make single-family home affordability weaker.
  • We will continue seeing strong deliveries with units already under construction, but this should taper considerably if economic growth moderates through 2018-2019.
  • Expansionary fiscal policy may be inflationary with respect to wages. Tax cuts could benefit renters with higher incomes and could prop up fundamentals of higher-end product.
  • Aggressive immigration policy could decrease population growth and household formation. These demand-side concerns are most likely to affect the Class B/C properties, which have been performing very well.

Interest Rates

  • Interest rates spiked in the aftermath of the 2016 U.S. presidential election. Despite some of the immediate market reactions, it is premature to conclude that there is or will be a decrease in capital values in commercial real estate.
  • Commercial real estate values will be affected over the next few months by many significant factors beyond just interest rates, especially the strength of funds flow from international and domestic sources.
  • Despite recent indications that China may limit the export of capital to large foreign real estate transactions, equity capital flows from international and domestic sources still remains strong by any historic measure. Furthermore, much of the post-election expansion in bond yields is related to investor funds flow/sentiment shifts from bonds to equities, as well as into sectors expected to benefit from the new administration’s policies, including infrastructure and defense. However, investor sentiment could change (and decrease bond yields) should we see an uptick in market volatility or other geopolitical shock.
  • In short, there are too many variables at play over the next few months to reach definitive conclusions on value today.
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