Former Real Estate Developer Trump Delivering for CRE
The Trump Administration’s early days have been quite good ones for commercial real estate, reported Cushman & Wakefield, New York.
“Commercial real estate values have held up well–up 2.4 percent since the election–and more product is entering the pipeline,” said Cushman & Wakefield Chief Economist Kevin Thorpe. “There has been a tremendous amount of capital targeting U.S. commercial real estate: closed-end funds have $144 billion of dry powder–up 9.8 percent since the election alone.”
In a Cushman & Wakefield special report about Trump’s implications for the property markets, Thorpe noted that so far there have been no changes to real estate policy such as to 1031 exchanges or carried interest that would fundamentally threaten the sector’s growth potential. He called the probability of a recession low.
“[But] while confidence measures have soared, the hard data on the economy (including GDP and retail sales) have not been nearly as impressive,” Thorpe said. “GDP growth is on track for just 1 percent in the first quarter.” He noted other “unknowns” including federal budget uncertainty, the status of NAFTA and other trade agreements and a potential Obamacare repeal and replace law.
On the downside, investment sales volume fell 26 percent year-over-year in the first quarter, Thorpe noted. “The weakness in activity was broad-based across market tier, product type and transaction size,” he said. “Few deals entered the pipeline in the fourth quarter due at least in part to uncertainty surrounding the election. Buyers and sellers have been in a stalemate on pricing as they adapt to the new political, environment and economic outlook–it is an open question who will be the first to move and exactly when, but not if.”
Thorpe cited the Chicago Board Options Exchange Volatility Index as a good measure of investor confidence or angst. “Since the election, volatility has remained low, suggesting investors are taking the new policy and economic environment in stride so far,” he said. “When volatility rises, commercial real estate pricing tends to soften or decline. Last year volatility spiked several times and we saw the smallest increase in prices since 2012.”
If volatility remains low, investment sales will likely pick up later this year, Thorpe said, noting that more product has started to enter the pipeline. “We expect this to accelerate,” he said. “The stage is set for a strong second half with the potential for 2018 to ‘borrow’ volume from current stasis.”
Thorpe said investor interest in markets and product segments that have lagged the cycle until now could increase in the near future. “We have already begun to see a shift in pricing momentum,” he said. “As capital expands its opportunity set, this should create a ‘virtuous cycle’ of further price appreciation, reducing spreads where they have run in advance of fundamentals.”
