By Kevin Thorpe, Chief Economist
Tomorrow represents the 100 day mark of the Donald Trump presidency, a milestone tracing back to Franklin D. Roosevelt. This is a time when political observers gauge the success and direction of a nascent administration. As we gain some clarity on current economic data and anticipated policy proposals, we are now prepared to evaluate how these might impact the commercial real estate market.
Equity markets have surged since President Trump was elected on November 8, gaining more than $3 Trillion in wealth during this time. While the stock market is not a true economic indicator per se, its success bears a direct impact on the commercial real estate market, as every $1 increase in stock market value boosts consumer spending by $0.03, typically creating increased demand for real estate space.
Job growth has been steady and has slightly accelerated since the election. Continued growth leads to healthy absorption levels, but as the U.S. approaches full employment, job growth will slowly decelerate, as will demand for space. Still healthy, but likely a decelerating trend in most markets.
Inflation and Interest Rates
Treasury yields have risen sharply since the election, with the 10-Year Treasury Yield rising 58 BPS and the Core PCE 3-Month (Annual) rising 97 BPS. Higher interest rates could place pressure on cap rates temporarily, but stronger NOI growth is expected to generally drive values higher.
Of President Trump’s policy priorities – whether executive orders or proposals in Congress – two areas to watch are taxes and trade.
President Trump’s broad outline of his tax proposal includes a drop in the corporate tax rate from 35% to 15%, repealing the alternative minimum tax, and advocating for a one-time, 10% tax on repatriated corporate earnings. Historically, tax cuts similar to this have produced stronger economic growth, but the fears of increased deficits, rising inflation, and interest rates go along with it.
One of the biggest concerns for commercial real estate is trade, particularly a proposed 20 percent Border Adjustment Tax (BAT), which would have a negative impact on retail, a sector that is already hurting. The good news is the BAT stands little chance of being passed (and Trump himself seems to be backing away).
While there have been some morphing positions on trade policy, uncertainty remains. A dramatic shift in trade policy could have many implications on inflation/interest rates, population growth, capital flows, etc. That issue will be particularly important to monitor.
Commercial Real Estate Moving Forward
Despite above-average building completions and a slowdown in leasing activity in 2016, office vacancy rates have hovered around 13.2% over the past four quarters, and asking rents have increased steadily. But supply is catching up. On the industrial side, the eCommerce revolution continues, leading to the lowest vacancy rate in 30 years at 5.5%.
On the investment sales side, while the past year has been difficult, there are indications the second half of 2017 and early 2018 will be stronger as more deals enter the market and new wave of capital is deployed.
The length of the commercial real estate cycle means directly attributing any of the above to the first 100 days of the presidency is difficult. That said, what we have seen so far presents a positive outlook for the market going forward.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.