How Trump Affects Commercial Real Estate

Even before he was sworn into office, President Donald Trump's planned to expand the economy by increasing job growth in a tight labor market, cutting corporate taxes, pulling back on financial regulations and raising infrastructure spending had garnered support from the business community.

Thirty days into his presidency, analysts are re-evaluating their economic outlook and businesses are speaking out against some of his executive actions, which Oxford Economist's head of U.S. macroeconomics, Gregory Daco, said has led to a highly volatile and uncertain business environment that could discourage economic growth and lead to market corrections. “I think there’s been somewhat of a repositioning from the business community that started with the immigration ban [but] that's a bit broader than that,” Daco said. “Essentially you’re seeing businesses come out more publicly and voice opposition to policies considered anti-growth.”

Here are several polices the president prioritized within his first 30 days in office and their potential impact on the economy, jobs and commercial real estate. 

Foreign Investment In Commercial Property

One policy that is still causing a stir is the executive order Trump signed Jan. 27 that temporarily banned travel into the U.S. for immigrants and refugees from seven different Muslim-dominated Middle Eastern countries.

Though only enacted for little more than a week before being halted in response to federal court decisions and undergoing further review, Daco said there has been a noticeable shift in relations between the Trump administration and businesses. “While most U.S. companies had so far shunned the limelight for fear of being targeted by presidential actions, many U.S. conglomerates expressed their concerns and general opposition to this new immigration stance … The concern is that this ban is a first step towards much more stringent immigration rules that would limit foreign entry into the United States, and thus cut the economy off [from] important sources of revenues from labor, education and tourism.”

Real estate attorney Ed Mermelstein said he has observed a slowdown in commercial real estate investment coming from Middle Eastern investors following Trump’s ban, adding many institutional investors remain cautious as they await Trump’s next move and any revisions. Mermelstein, a real estate attorney at RBM LLP and an international real estate lawyer at One & Only Realty Holding, said there also has been an uptick in capital injections from Russian investors into U.S. property markets. “It’s basically the opposite of what’s happening with Middle Eastern investors,” he said. “Based on the transactions both within our legal office as well as in our brokerage we’ve seen a 100% pickup from our client base coming out of Russia. [There’s been] such a tremendous drop-off in the last two to three years because of sanctions — investors dropped off and there was huge discouragement ... [and] significant political threats for anyone who invested in the U.S.”

But Mermelstein said since Trump’s Nov. 9 upset victory, there has been a pronounced change in the real estate dealings between Russia and the U.S. “Since the election took place [there’s been] a warming of relations between the U.S. and Russia … [and] that has translated into deals,” he said.

Economic Vulnerabilities To Anti-Trade Talk

In an outline detailing his first 100 days in office, which Trump released at the end of October, one of the president's primary goals was to protect American workers by reworking trade deals that he said took jobs and money out of the country. In alignment with this plan, Trump pulled out of the Trans-Pacific Partnership treaty during his first week in office.

The deal involved 12 nations and was negotiated over the course of seven years by former President Barack Obama; it allowed for minimal tariffs and other trade benefits for all of the countries involved. Some experts said the president's movement away from trade deals could lead to uncertainty for multinational companies and foreign investors.

“The prospects for growth from deregulation and expected tax cuts has buoyed the mood of everybody, including the corporations. However, the anti-trade talk that will lead to a trade skirmish, especially with our closest neighbors and trade partners, is a serious cause for concern,” said Rajeev Dhawan, Georgia State University/J. Mack Robinson College of Business director of economic forecasting.

Similarly, Trump signed an executive order within his first week calling for a reworking of NAFTA, the North American Free Trade Agreement that the U.S. has been in since 1994 and that allows for the flow of goods between the U.S., Canada and Mexico without high taxes and tariffs. Trump has labeled it the “worst trade deal in history,” claiming it has stolen millions of U.S. jobs.

These claims hold some truth, but the economic implications of withdrawing could be brutal, experts said, as millions of American workers rely on trade between these three nations. Dhawan said canceling trade deals could carry implications for the 10-year bond rate. Should America embrace anti-trade policies, it could cause foreign investors to back away from the market, leading to a rise in long-term bond yields and thereby boosting mortgage rates, Dhawan said. “That disruption has dangers for residential and commercial construction,” he said. “Trade rhetoric is also not good for the industrial and warehousing part of the real estate market, where the market has been hot. These skirmishes can cool that activity in a hurry.”

Mexican Border Wall

Mexico-U.S. relations have become strained as the president’s push to build a $22 Billion wall along America’s southern border is ruffling feathers. Trump has said Congress should fund the initial costs to build the wall, claiming Mexico will pick up the bill at a later date — but Mexican officials said that will not happen.

The president has proposed a 20% tax on all Mexican imports to the U.S. to make up for the costs, which has many American-based multinational corporations worried about their cross-border businesses. Texas, Arizona, Michigan, New Mexico and Kentucky are the five local economies that would suffer the most, as these states have the highest percentage of exports sent to Mexico, according to a recent report from WalletHub.

The concern for commercial real estate goes beyond spending on the wall and its economic implications, centering on the challenge of a tighter border and what it means for the workforce. The construction industry has been facing an array of challenges, including rising costs and a lack of qualified talent in the tight labor pool. There is already massive competition in the industry as oil and gas producers lure as many workers as they can with much higher wages. Couple that with the costs of construction materials and that a large number of construction workers are undocumented, and there are clearly challenges for the industry.

CRE Execs Boost Bets On Infrastructure Spending

Experts are forecasting a mixed outlook this year as gross domestic product, inflation and interest rates are all poised to increase, and the industry is betting on Trump’s plans to boost infrastructure spending.   Private equity funds and REITs in particular are looking beyond the primary commercial property sectors to alternative options like infrastructure in search of returns because most sectors (particularly hotel and office) are maturing, and rising interest rates are expected to compress cap rates.

The majority of CRE execs that participated in a recent Altus Group survey overwhelmingly named infrastructure as a safe bet this year, with Trump’s plans to invest $1 trillion in projects throughout the U.S., Altus Group director of research Chuck DiRocco said. Trump also tapped longtime real estate moguls Richard LeFrak and Steve Roth to oversee his infrastructure agenda. “This infusion of capital and more spending in the infrastructure arena sounds fantastic, but there’s obviously a lot of red tape to get through to get these things passed and where we need it,” DiRocco said. “But if they can build on infrastructure and ease regulations, I think we need that revival and that development.”

By: Champaign Williams, National Editor, BisNow, February 20, 2017