A Year Under Trump: Why The Real Estate Industry Is More Optimistic Than Before
President Donald Trump will celebrate his first year in office Jan. 20, with quite a few accomplishments under his belt to make real estate executives look forward to year two.
The year was filled with highs and lows, from the passing of the new tax law to chaos on Capitol Hill surrounding the Russia probe and concerns regarding Trump’s immigration policies. Despite the uncertainties that plagued 2017, commercial real estate professionals remained cautiously optimistic about the president’s business-friendly agenda and how it would benefit commercial real estate.
Now, as the industry looks to the new year, those sentiments persist — only stronger. The passing of the new tax law was a big win, and Trump’s plans to increase infrastructure spending could provide economic stimulus during what is one of the longest cycles of economic expansion in U.S. history.
“A lot of indicators suggest that 2018 is going to be a stronger year than 2017. Rising wages and rising labor productivity, … and overall indicators that would drive U.S. economic growth are looking up,” Reis Chief Economist and Senior Vice President Victor Calanog said. “That both excites and scares me. It’s scary because at some point we’re going to have to justify valuations over rising incomes. As interest rates rise very quickly it might rise to the point where it chokes off growth.”
Bisnow compiled a list of the major initiatives Trump tackled in 2017. Which proposals were a success? Which were a failure? Which will provide the greatest boost to the industry?
The Tax Cuts and Jobs Act proposal passed at the end of 2017 and is largely lauded as a benefit to the commercial real estate sector. But creating the bill did not take place without some scrutiny.
While most were relieved to hear early on in the process that the like-kind 1031 exchange, which allows companies to trade in old assets for something new, had been preserved, many were surprised to learn that the carried interest tax break, which Trump had openly opposed during his campaign trail, had also been retained.
In addition to stimulating the economy in the near term, the new tax law is expected to provide a boost to property owners, developers and multifamily in particular. Among the larger changes to the tax system is a provision for limited liability companies, partnerships and pass-through businesses that now provide individuals making under $157K and joint filers making less than $315K the opportunity to take a 20% deduction on taxable income.
As for multifamily, the new system strips away some of the long-standing benefits that would incentivize Americans to become homeowners. Apartment owners may see a boost in demand as a result.
Trump wasted no time jump-starting plans to renegotiate NAFTA. Within his first week in office, he had signed an executive order calling for the renegotiation of the treaty between the U.S., Mexico and Canada, and he has repeatedly threatened to pull out of the pact altogether.
While a new agreement could impact the flow of goods between the three countries, Trump promised it would bring jobs that were lost under the current agreement back to America.
Most recently, the president made claims that new terms could help finance the U.S. - Mexico border wall, a possibility Mexico Chief NAFTA Negotiator Kenneth Smith Ramos fervently denied.
Should negotiations fall apart, the largest impact would likely be felt in the industrial and logistics sectors, which would face disruptions in the flow of goods and materials.
The parties are scheduled to meet again on Jan. 23 to continue the debate.
U.S.-Mexico Border Wall
One of Trump’s key campaign promises was to enhance national security by building a border wall with Mexico.
While talks of a new U.S.-Mexico border have remained consistent into his presidency, both the numbers and the method of paying for the wall have varied.
The discussions have caused mounting tension between NAFTA parties with Mexico officials threatening to walk away from negotiations in February when the U.S. suggested imposing tariffs on Mexican products to pay for the wall. At the time, it was estimated the wall would cost $22B and take approximately three and a half years to construct.
In March, the president proposed cutting education and medical research programs, among others, by up to $18B but by April had decided to delay finding funding for the wall until September.
Although four companies were contracted in the summer to build prototypes — a phase which is expected to cost $20M — the ultimate fate of the wall has yet to be decided by Congress.
In 2018, the Trump administration requested $18B from Congress to build the wall over 10 years. It is expected to cost a total of $33B by the time it is complete and would expand on the current 654-mile barrier separating Mexico and the U.S.
Financial Deregulation — Dodd-Frank Overhaul
Dismantling the Dodd-Frank Act and replacing it with regulations to promote job growth and boost the economy was top among Trump’s campaign policies.
In an interview with the Wall Street Journal in November 2016, Trump said banks were regulatory-burdened because of the act and were unable to easily lend capital, resulting in stunted economic growth.
By June, promises to rework Dodd-Frank made headway when House Republicans approved a bill to do so in a 233-186 vote. The bill was named the Financial Choice Act and aimed to erase and rework many of the rules and laws initially put in place by then-President Barack Obama.
In November, the Senate Banking Committee reached an agreement to update and amend portions of the Dodd-Frank Act. The new agreement provides relief to smaller banks by increasing the threshold from $50B to $250B for Systemically Important Financial Institutions. This factor relieved approximately 20 banks from being held to standards aimed to protect liquidity and capital, as well as manage risk.
Trump’s immigration talk has dominated headlines since his campaign trail, from his referral to Mexican immigrants as rapists and murderers, to his travel ban and a pledge to deport around 11 million undocumented immigrants from the country.
Though an increase in Immigration and Customs Enforcement arrests has been reported, much of the above-mentioned policies are still in the works.
As progress is made on that front, several segments within commercial real estate are expected to suffer, particularly where labor is concerned. The already-tight labor pool has left a void for available talent across the labor market that employers are having a difficult time filling, and stricter deportation laws could result in fewer immigrants coming into the country in pursuit of work.
This could also lead to fewer projects getting off the ground due to astronomical construction costs, a slowdown in the pace of new deliveries and a pullback in foreign travel to the country — the sting of which the hotel sector has already experienced.
“One of the things getting talked about is a notable increase in construction costs. Any number of some of the proposals out there could lead to further acceleration in construction costs, [such as] DACA [Deferred Action for Childhood Arrivals]. Construction is one of the largest industries where DACA individuals are employed,” Ten-X Chief Economist Peter Muoio said, adding that concerns regarding the construction of the border wall, infrastructure upgrades and the impact those efforts will have on construction prices are also circulating.
“If you’re a developer it’s bad because it makes it more expensive to put up a property. If you’re an owner of existing property, you’re happy because in a way it helps limit potential competition if development slows,” he said.
Increased Infrastructure Spending
Trump highlighted the country’s need to set aside billions to update its crumbling infrastructure early on during his campaign and within his first 100 days in office. The initiative was pushed to the back burner last year to prioritize immigration, healthcare reform and the tax overhaul, but White House officials say the president’s $1 trillion infrastructure spending proposal will be released this month.
The plan calls for an estimated $200B to be spent in federal funds over a 10-year period in order to incentivize another $800B in state, local and private sector spending. Of course, this is easier said than done, with public-private partnerships — often fraught with risks and challenges — expected to be instrumental in seeing the plan through to fruition.
Many in commercial real estate are rallying behind the bill and see it as a boon to the industry, if lawmakers can ever make it past the red tape.
“If the admin follows up with infrastructure spending that’s the more important investment we actually need to make,” Calanog said. “I’m not talking about building a wall, but infrastructure … the only negative [would] be the inflationary pressure from how it's financed.”