By Ken McCarthy
Principal Economist, Applied Research Lead, Americas
It’s been nearly four weeks since Donald Trump became President-Elect Trump. Like the so-called Brexit event of a few months ago, this election was both a shock to many, despite close polls, and a signal of a shift in the political winds. It has also left many, from economists like me to folks just wondering about how this will affect their day-to-day lives, scrambling to figure out the implications of a Trump presidency on our economy. Here at Cushman & Wakefield, we of course also want to know specifically how it will impact the commercial real estate market.
The challenge with predicting the impact of Trump’s economic policies is that we really can’t pin down for certain what they may be. In fact, we probably know less about Donald Trump’s plans and political ideology than any president-elect in modern history. And so the first counsel that I can offer is simply breathe. This isn’t an apocalyptic event that many make it out to be. There will be policies, and like any president, some will be positive and some not so much. I recently gave a webinar that I invite you all to visit here, where I discussed four areas of policy where we have some inkling of Trump’s dispositions, and how they would impact our economy and CRE market. Following is a brief overview of the discussion.
President-elect Trump’s tax proposals are one of the areas where he has taken traditional Republican positions. The four most specific proposals he has offered are:
- Reduce the corporate income tax from 35% to 15%
- Consolidate personal income tax brackets from seven to three, with the top rate reduced from 39.6% to 33%
- Keep the capital gains tax at 20%
- Eliminate the estate tax
These tax policies are likely to have a positive impact on the economy, particularly in New York. Lower taxes will support strong growth. The New York Metropolitan Area is one of the richest in the nation, with a median household income of $69,300. These tax reductions are likely fuel greater spending and provide economic stimulus. The elimination of the estate tax will also keep wealth in the region, further supporting economic growth.
This strengthening of the economy can only help the local CRE market. More jobs means greater demand for office space. Faster income growth likely boot retail and industrial demand. The stability of the capital gains rate could lead to more property sales in 2017.
Changes in regulation could have the most immediate positive impact on the economy, especially in New York City. Trump’s plan to eliminate the Dodd-Frank Act could have a dramatic impact on New York, as Manhattan has become a sort of second financial capitol of the world, after London. It is home to 450,000 financial services jobs, comprising 11% of the jobs market – well above the 5.7% for the U.S. This deregulation alone will provide a boost to the local economy.
Unsurprisingly, then, the financial sector is the largest occupier of commercial space in New York City, eating up 33% of all available space. Helping the financial sector will only increase office demand in that sector, which will help boost the CRE market here. Changes to Dodd-Frank have the potential to have the biggest positive impact on the Manhattan office market.
Infrastructure spending is typically a Democratic policy priority, but Donald Trump has proposed $1 trillion in infrastructure spending over 10 years. Its impact on the economy is promising, with a caveat: Trump has indicated that much of this spending will be privately funded. If that doesn’t happen, the combination of tax cuts and increased spending would would significantly increase the budget deficit. In order to avoid that, either tax policy or infrastructure spending would have to be scaled down. But going with the premise that the private funding will happen, infrastructure spending would be a huge boon to the economy, and will have a particular impact on the New York region.
New York is in the early stages of a major infrastructure expansion. Plans and proposals include:
- Rebuild the Port Authority Bus Terminal
- Build a new train tunnel under the Hudson River
- Moynihan Station
- Enlarge and rebuild LaGuardia Airport
- Long Island Rain Road East Side Access
- Build a new Tappan Zee Bridge
Federal support could speed these projects. When completed, they will create jobs in a wide range of industries, boosting the local economy and increasing the demand for office space. Without their completion, the city would suffer relative to its global competitors.
This is the area of Trump’s policy proposals that is likely to have the most negative impact on the economy, particularly with his disposition towards protectionism. He has forcefully rejected the Trans-Pacific Partnership (TPP), both as a candidate and as president-elect. He has generally been wary of free trade agreements. If his proposed trade policies are enacted, U.S. trade is likely to decline, weaken the U.S. economy, and according to several economic models could push us into a new recession.
The New York region would be disproportionately negatively impacted by such a scenario, given its position as a financial center and international hub. A recession would hurt the local office markets, and the industrial market would particularly suffer from reduced trade flows.
The best piece of advice I give to everyone who asks me about this election is simply to calm down. The United States is not a dictatorship. Any policies would have to pass through congress. His most negative policy, trade, is entirely heterodox to the Republican congress now controlling both houses. Now is the time to relax, continue with our lives, and wait and see.
To hear a more in-depth analysis of these topics, visit our webinar here.
Ken has been with Cushman & Wakefield since August 2006. As Principal Economist, he works with the Chief Economist on Cushman & Wakefield’s U.S. economic position and presents it to the public. As Applied Research Lead, Ken is responsible for preparing cutting edge research about the outlook for commercial real estate in the Americas.