The election of Donald Trump as the next President of the United States has raised questions about what this means for the real estate industry, U.S. policies and the economy.
According to JLL Research, underlying real estate markets are expected to remain relatively steady although political headlines and, potentially, financial markets may be volatile until policy details are defined and implemented.
On January 20, 2017, Trump will be the first President to take office without having help a prior official public or military position, so there is no precedent as to how exactly he will govern as compared to how he campaigned.
The markets, despite having priced in a Clinton Presidency, have reacted differently than most expected. Compared with the initial post-Brexit reactions of four to 10 percent equity markets declines around the world, equity prices in the United States have increased meaningfully in the past few weeks and bond prices have declined as investors expect higher growth, higher inflation, and higher interest rates in the future.
Treasury yields moved upward and the Fed is widely anticipated to hike short-term rates at their next meeting in December and additionally in 2017. U.S. 10-year yields are currently at their highest point in eight months (around 2.0 percent). The yield curve is steepening.
U.S. markets have been surprisingly resilient.
The Republican sweep opens up a range of opportunities, but the reality is that Trump is not a typical Republican, and angst and disagreement remain within the Republican Party. The net result could be some economic benefit from fiscal stimulus and less regulation, but risks around foreign policy, immigration, and trade. Until the policy particulars start to take form, the ultimate impact on the economy and real estate will be uncertain.
With financial industry regulation likely to either loosen or at minimum, no longer tighten, capital flows may improve and create a short-to-medium term net positive for investment activity and performance. However, lower regulation could lead to more risk or volatility in the longer term.
Counter to popular belief, cap rate and interest rates are not positively correlated historically due to the importance of fundamentals and the real estate risk premium, both of which tent to improve with accelerating underlying growth. While interest rates have increased, cap rates are low, with spreads at historically healthy levels and fundamentals sound across real estate sectors.
Fiscal and trade policies that could lead to higher inflation and interest rates could impact pricing if not offset by faster growth, but we do not expect much change initially.
Overall on the demand side, U.S. companies are likely to adopt a wait-and-see approach to decision-making as the presidential transition efforts get underway and cabinet positions begin to solidify. The potential of lower regulation, increased defense spending and tax cuts would on their own be pro-growth positive for real estate demand, but the timing, mix, and other offsetting policies or compromises are still unknown.
Until the policy details are defined and implemented, JLL expects political headlines and potentially financial markets to be volatile, but underlying real estate markets to remain relatively steady.