The shock election of Donald Trump could be favourable for US real estate. But Mexican-border property could be the first big test, writes Christopher O’Dea
When the smoke cleared in the US Rust Belt early on Wednesday, Republican Donald Trump had pulled off the biggest political upset in American history and, come January, a property developer will occupy the Oval Office for the first time.
Trump defeated Hillary Clinton to give his party simultaneous control of the White House and both houses of Congress for the first time since the early 20th century, an alignment of power that increases the chances Trump will able to implement his initiatives, and suggests he will be able to appoint Supreme Court justices that would support a longer-term rollback in government regulation.
Trump achieved his victory in a way that only a property mogul could. He bulldozed the ‘blue wall’ of states across the US industrial heartland that had voted Democratic in most presidential elections since the 1980s, using anger towards elites about trade and immigration to pull Reagan Democrats into a new configuration of Trump Republicans.
While it will take some time for the implications for US and global property markets to become clear, investors and analysts believe Trump’s surprise victory will on the whole be favourable for property values. But this is dependent on enacting growth-oriented policies such as tax cuts and infrastructure spending that were articulated during the campaign, while at the same time avoiding damage to the economy by moderating immigration and trade policies that could impair growth if implemented in the tough form Trump laid out. Trump’s desire to repeal regulations such as Department of Labor fiduciary rules could also spark renewed activity in the property fund sector.
“This is the biggest political upset in modern history,” says Stanley Iezman, founder and CEO of American Realty Advisors. “The significance of this is unquantifiable.” Based on historical norms, “we really don’t know what this is going to look like,” Iezman says.
While there is great uncertainty, Trump’s campaign positions suggest that his Supreme Court appointments would favour a loosening of regulatory restraints, and his policies will probably be more business-friendly. “The most important thing right now is the matching of rhetoric to action,” Iezman says.
Trump’s election “represents a material change of direction in foreign and economic policy by the world’s largest economy,” says Spencer Levy, head of Americas research for CBRE. While expecting short-term volatility, “we believe that the election result will not have a negative effect on economic growth in the next two years”.
Noting that US commercial property has averaged a 9.1% return since 1999, according to MSCI, Levy says property will be “well able to hold its value and deliver a competitive return despite these most recent changes in the political landscape”.
The main caveat, Levy adds, is the assumption that “a reasonable degree of continuity in US trade policy” would support economic growth. But the trade and immigration positions Trump has outlined are “radical policy departures”.
Some economists have suggested that, by restricting the supply of cheap goods from low-cost producers, trade barriers would help the US escape the current low-inflation environment and allow interest rates to normalise. Other economists emphasise the benefits consumers receive by having access to cheaper goods. Trump will need to balance those positions. “A tit-for-tat trade war, if it were to happen, could damage the global economy,” says Levy.
Iezman cautions that the potential for trade frictions poses an increased risk for some industrial property. “If [Trump’s] rhetoric is actually translated into action it certainly would not bode well, in the real estate sector, for the industrial segment that is dealing with cross-border trade,” he says. The impact is already being felt in the area of tenant assessment. “We’re going to be looking very deeply at tenants, in terms of the type of business they’re in,” Iezman says. “Anybody who’s dealing with cross-border trade, we’d probably be a lot more concerned with.”
Those concerns are brewing on the US-Mexican border. Trump’s calls for a border wall to stop immigration from Mexico – and his vow to cancel the 25-year old North American Free Trade Agreement – caused a sharp sell-off in the Mexican peso as the prospect of a Trump victory emerged.
Mexico’s president reportedly spoke with Trump on Wednesday to discuss meeting to resolve such issues. But annual inflation in Mexico rose slightly above the Bank of Mexico’s 3% target in October, the national statistics agency said on Wednesday. That sparked concerns that the weakening peso is starting to have an impact on prices – it’s the first time since April 2015 that annual inflation exceeded the target, increasing chances of an increase in Mexican interest rates next week.
Mexican auto-manufacturing hubs located in the centre of the country have been thriving. Tenants leased 3.96m sqm in the top 15 markets during the first three quarters of 2016, compared with 3m sqm for the first three quarters of 2015, according to CBRE. But activity in the border region that is home to manufacturers of appliances, electronics and apparel sold to the US under NAFTA began slowing during the election campaign, CBRE says, with leasing declining in Monterrey, Juarez and Saltillo during the first three quarters of 2016 compared with 2015.
Ironically, since Trump has indicated he will not reappoint Federal Reserve chair Janet Yellen, economic policy might resemble the “high pressure economy” that she mused about in a speech in Boston last month, says Ed Keon, portfolio manager at QMA. Yellen “envisioned an economy that runs hotter, with inflation temporarily above the Fed’s 2% target as a way of drawing more people back into the labour force, increasing the potential long-term growth rate and increasing wages”, he says. If Trump’s policies do spark growth and a fiscal surge, “we might well see at least modestly higher inflation”, Keon says.
That could aid property investors. “Inflationary pressures in the economy are real,” says Iezman, “and we see that translating into higher values long-term.”
But only time will tell how Trump’s policies affect property. “The hardest part of this, as I like to say at our investment committee, is that prediction is very difficult,” he says. “Especially about the future.”