At 12.00 noon EST today, Donald J Trump will become the 45th President of the United States of America in what will be the Nation’s 58th Inauguration Ceremony.
At the age of 70, Donald Trump will be the oldest man ever to be sworn in as President, edging out Ronald Reagan by eight months. However, according to the latest weather forecast, other Inauguration Day records - for snow (10 inches / William Taft), rain (1.77 inches / FDR), heat (55 degrees F / first Ronald Reagan) and cold (7 degrees F / second Ronald Reagan) are unlikely to be broken. But who would place a bet on Trump not breaking the record for either the shortest address (George Washington /135 words) or the longest one (William Harrison / 8,495 words / 100 minutes)?
No doubt the real estate industry will be wishing Tom Barrack (Colony Capital) well today as it has been his responsibility to plan the event. By all accounts this has not been as easy as he may have hoped, not least because many of the usual array of Hollywood stars are likely to be absent.
So how do St Bride's Managers US think the real estate market will be influenced by Trump’s election as Commander-in-Chief?
Trump tells us that his goal is to boost GDP growth to 3.5% per year. This compares with an average of 2.1% per annum over the last seven years - the slowest seven year period since the 1940’s. He claims that this GDP growth should create twenty-five million new jobs over the next decade, although some of his arithmetic appears a bit questionable.
The Donald's vision is to “reduce taxes across the board for working and middle-income Americans’’. He has also stated that he will reduce the business tax rate from 35% to 15%. If this sort of fiscal stimulus does materialise, there would inevitably be a very favourable knock-on impact on the demand for real estate space.
The new President has pledged to dismantle the Dodd-Frank Act which was introduced in 2010 following the Global Financial Crisis. The Act’s aim was to prevent banks from being so reckless. Frankly (excuse the pun) its introduction has been a massive pain in the backside. Moreover, since then, the banks have shrunk, their profits have fallen and their proprietary trading desks have been confined to history. While the legislation is unlikely to be repealed completely, looser regulations, making for easier lending conditions, would definitely filter through and benefit the real estate markets.
Trump has claimed that over the next ten years, $1 trillion will be spent on infrastructure to improve highways, bridges, tunnels, airports, schools and hospitals. That said, he expects much of it to be privately funded! Certainly, most US property markets would benefit from improvements in local infrastructure.
The emphasis on fiscal stimulus and spending has been well received by the stock markets. At the closing bell yesterday, the Dow Jones Index stood at 19,732.40, a gain of 7.6% since Election Day (18,332.74). The S&P 500 (5.8%) and NASDAQ (6.7%) indexes have also made handsome gains.
Bonds have reacted in the opposite direction, with the yield on the key 10 Year Treasury increasing from 1.83% at the start of Election Day to 2.47% yesterday, having peaked at 2.60% in mid-December. Last month also saw the Fed increase rates for the second time in a decade - by 0.25% and it is signaling three further increases in 2017 to a projected rate of 1.4%.
Real Estate Markets
One might hope, being a long time real estate ‘mogul’, that the President’s policies will be friendly to our industry. Here are some potential implications:
- Reduced regulation, greater economic growth (though tax cuts) and higher spending would definitely benefit financial services, technology and defence – and hence offices. The latter, in particular, would benefit Washington DC and Northern Virginia. However, changes to Obamacare, (which, after the last few days now looks more likely), could have a short term negative impact on the demand for medical offices.
- Faster economic growth and real wage growth would improve consumer confidence and spending and this would feed through into the retail sector.
- However, import-driven industrial markets could be negatively impacted by a more protectionist trade policy.
- In the near term, the multi-family residential (rental) sector could benefit as rising interest rates would weaken the affordability of single family homes (ownership). The jury is out for the longer term.
- We expect US investment, especially into the UK and Europe to remain robust. Since Election Day, the dollar has traded slightly stronger against the Euro (1.066 vs 1.103), and virtually unchanged against the pound (1.234 vs 1.237). We suspect that with the two or three interest rate increases projected in 2017, the situation is unlikely to change very much. If that is the case, then in all likelihood capital currently invested in Europe will simply be recycled into new deals rather than exchanged back into dollars. To the best of our knowledge, the activities of Starwood, Blackstone, Westbrook, Hines and other US investors currently in the UK and Europe are unlikely to change.
Of course, it is possible that the execution of the President’s policies will be “much easier said than done”. ‘Making America Great Again’ then would be much harder to achieve. All that said, in 2017, we expect cap rates to remain within 25 to 50bps of their current ranges. And that wouldn’t be such a bad result given these uncertain times.
For more information, please contact Richard Saunders - email@example.com (New Address: 777 Summer Street, Suite 503, Stamford, Connecticut, 06901)