As the White House slowly settles down, and with the recent release of President Trump’s budget blueprint, we are beginning to see a possible direction the new administration may be taking. Key word being possible.
But what about commercial real estate-what could be next? Here are a couple of things to consider:
Lower Taxes, Less Regulation, More Lending
From the beginning of his campaign, President Trump has been a supporter of lower corporate taxes, deregulating the government, and economic prosperity. We know that rapid economic growth means that the Federal Reserve will step in to temper the growth by raising interest rates. Raising interest rates in turn will put pressure on commercial real estate yield spreads, but could also encourage more bank lending.
Could higher interest rates and a healthier economy mean more lending by banks? The Trump administration’s executive order aimed at scaling back the Dodd-Frank Act, as well as his freeze on new or pending regulations means banks should be able to do business without worrying about new restrictions or penalties for the first time since the financial crisis. Higher interest rates should also make banks more willing to lend because loan spreads will be more attractive.
As the Economy Goes, So Goes Commercial Real Estate
Typically, that which is good for the economy is good for commercial real estate. The administration’s support for lower taxes and increased infrastructure spending should spur economic growth. Dubbed by some as the ‘Trump bump’, his policies are expected to encourage more bank lending and greater activity in the capital markets.
With the ‘Trump bump’ comes very irrational and combative dialogue from the White House. The American people have not seen such an outspoken and rash White House like we have seen since January. And that makes investors nervous. The protectionist stance the Trump Administration is taking on trade and immigration is raising investor’s concern about global economic growth. And when there is concern, it leads to “pause” of investor activity. With regards to commercial real estate, the heated debate around illegal immigration, as well as the high percentage of illegal immigrants in the construction industry, might exacerbate existing construction labor shortages. If the economy grows, demand for office buildings increase, will we be able to meet the need?
What Does the Future Hold?
I have hopes that commercial real estate will continue to maintain satisfactory growth in 2017. Our industry has been driven by solid fundamentals, historically low interest rates, good value and strong total returns. The real estate market has performed well without overheating. Prices are back to pre-crisis levels for most major property types but the pace of gains has eased as investors and developers have demonstrated more discipline. These factors have helped create a stable foundation for the market and point convincingly to continued sustainable growth.
Longer term, however, most investors are focused on whether the market is getting closer to the end of its current cycle and whether it is reaching a peak. With a very outspoken, and at time irrational President and the market’s solid foundation, we expect the near-term market to be strong but beyond that caution should be exercised based on historical economic and market cycles and if interest rates are significantly raised.
Finding the Value in the Market
Value can and will be able to be found in the commercial real estate market. We have been exploring alternative property types in Montgomery County. Assets that need repositioning is a perfect target for many current investment strategies. For example, vacant office parks that are converting to laboratory space could offer investors enticingly higher returns. Every investor wants to have the ability to select an investment that is tailored to their specific needs, requirements and control. We know of those options in the market. Contact us to hear more.
I believe the future could be bright for the commercial real estate industry—but we need to be informed, cautious and prepared.
And if you are thinking about getting into the market or have concerns about your current properties, give me a call. I would be happy to share what I know, and where the market could go.