Real estate investors should focus on fundamentals, more than politics, in second Trump term, writes Brian Klinksiek
The impacts of US presidential elections on investment outcomes, especially for real estate, are often overstated.
An excessive focus on the news cycle can distract from important ongoing trends that are not ‘new news’, such as structural changes within property markets.
So while the inauguration next month of Donald Trump for his second term as US President will of course be a globally and historically significant event, it is not likely to dramatically change the picture for the real estate sector compared to pre-election expectations.
Over recent months, the research team at LaSalle has been developing our ISA Outlook 2025, which has as its central theme that the real estate cycle is turning and reaching a new dawn across most of the world.
We believe that a transfer of power in the world’s largest economy, even to a rather different type of presidential administration, does not affect this picture nearly as much as some observers have suggested.
Counterbalancing impacts for US real estate
In the aftermath of the US election, market movements pointed to expectations of significantly higher growth, inflation, and interest rates. But the election result is likely to contribute to only marginal shifts in that direction.
If we are right, that would limit the impact on what LaSalle sees as the new dawn that 2025 will bring for real estate.
A range of factors are expected to limit what the incoming administration can do – especially around policies that require a filibuster-proof Senate majority to enact.
Meanwhile, Trump’s well-publicised plans to boost domestic economic growth prospects by reducing regulations could be a disinflationary force working against what many expect to be the inflationary impact of more and higher tariffs, and a reduction of the labor force through lower net migration.
Real estate sectors will likewise see a complex, offsetting mix of impacts. The multi-family sector in the US, for instance, may face a weaker demand outlook if household formation is lower due to sharply reduced immigration.
However, it may also experience less new supply if the construction labour force is constrained. There is a similar variation in potential impacts for logistics markets.
Trade barriers may lead to more regionalised production, which at the margin could lead to established and emerging manufacturing nodes seeing more demand. Meanwhile, import/export-related locations, such as submarkets near ports and airports, may see less demand.
Demand drivers trump geopolitics in overseas markets
The uneven impact of a Trump presidency on real estate as an asset class – and the primacy of factors unrelated to US politics in determining the performance of real estate markets in the coming years – are also true outside of the US, and especially in Europe.
Post-Covid, European real estate returns have become decoupled from GDP growth. For European real estate investors this is a positive development, given the continent’s backdrop of sluggish growth.
Tariffs now present a real and additional threat for European economies, but real estate fundamentals could benefit from a variety of factors that may provide insulation from them, such as severe supply barriers.
In fact, even as a trade war threatens transatlantic export volumes, the European real estate market is looking buoyant. Investment activity ticked up in Q3 2024 after seven consecutive declines as capital slowly returned to the market.
Yield spreads now exceed their long-term averages and go-forward returns for the overall European property market are at their highest level in over a decade – a function of a repriced going-in basis and a positive outlook for the supply-demand balance.
This is also borne out across LaSalle’s portfolio. Data tracked by LaSalle’s asset managers show 2024 rents for new and renewed commercial leases across the firm’s European portfolio grew 2.7% relative to expiring passing rent, representing a return to an above-inflation pace.
An end to the ‘beds and sheds’ era?
Yet variation persists within real estate asset classes, whose recent relative performance has been upended. The industry’s narrow focus on ‘beds and sheds’ is finally widening.
Although European logistics real estate earned a larger role in investor portfolios over the past decade, enjoying the highest returns of any European property type in eight of the last 10 years, its long-standing relative advantage has started to erode.
Similarly, a blanket allocation shift toward European regulated residential would no longer enhance nominal returns, because that sector’s yields tend to be below the all-property average.
Meanwhile, there are a growing number of specialty sectors in the US and Europe that are taking an increasing share of investment flows.
At a global level, the outlook for real estate is largely positive. While it is of course prudent to continue to monitor the policies of the new Trump administration, investors will better position themselves to build a well-balanced real estate portfolio by taking a comprehensive look at value across a wide range of sectors and markets.
Investors have been diversifying into logistics and residential due to their attractive long-term fundamentals, but should not overlook retail and office, which are back on the menu. They should focus on diversified core strategies that are flexible and broad enough to adapt to a complex and dynamic relative value landscape.
Those who recognise and adopt a fair or relative framework will likely reap advantages presented by this new cycle and maximise returns over the course of the incoming US administration – independent of whatever policy course it ultimately follows.
To read the latest IPE Real Assets magazine click here.
