Donald Trump's Impact May Not Be Felt Right Away In Office Real Estate
Although his name is on everyone’s lips as his inauguration approaches, Donald Trump may not be able to affect much in the office real estate market, at least in 2017.
Many in commercial real estate have been juggling two ideas about a Donald Trump presidency since Election Day — the potential benefits of a real estate developer in the White House and the potential negative impact of an erratic decision-maker on the national and global economy. But for now, all anyone can do is wait.
The safest bet in terms of prognostication seems to be that Trump will look to deregulate the financial industry, but no one is sure just how much he’ll try or be able to pull off. Investors, however, are looking forward to an easier lending environment.
“I think it should be [positive],” Brandywine Realty Trust’s George Hasenecz (above) said, “but a lot of it has to do with if people feel like the economy is growing and there’s job growth, then investors will be more bullish.”
Among the likely targets of deregulation is the Dodd-Frank Act, which, if it was repealed or defanged, would have an appreciable impact on commercial real estate specifically.
“If [Trump] does something along those lines,” said Rubenstein Partners’ Stephen Card (below), “it could certainly help the lending environment. It could lead to a direct correlation to an increase in real estate values.”
Of course, rolling back protections put in place in the wake of the Great Recession could bring up concerns of a return to the environment that allowed the housing crisis to happen in the first place. But Card and Hasenecz agree that it’s unlikely to come to that point.
“I don’t think it could be a 100% reversal, it could just be a pulling back of some of the more onerous regulations,” Card said. “I think it’s going to be a little more tempered. But again, that’s the question of what he can actually do or get done … His ability to govern and pass things is still to be determined.”
“What got us in trouble during the last downturn was the lending standards had gotten pretty lax,” Hasenecz said. “There were a lot of projects back then that wouldn’t have gotten financed in this lending environment.”
As has been overshadowed by the specter of Trump from the very beginning of this election cycle, state and local governments also have a major effect on the law, which includes regulations. In Philadelphia and Pennsylvania, not much has changed since the election of Mayor Jim Kenney.
“With the change of administration, there’s optimism in Philadelphia,” Card said. “But until things actually change, people here will believe it when they see it.”
Right now, what people see in Philadelphia office has been the delivery of the FMC Tower and Aramark’s impending move to Market West, and a slightly below-expected net absorption rate in 2016 that still hasn’t dulled many investors’ enthusiasm in the region.
“We want to buy more in Philly, so we are speaking with our wallets,” Card said.
“The fundamentals are pretty good from an office leasing standpoint,” Hasenecz said. “It’s pretty tight, especially for larger users, so there’s enough good news on the fundamental front for investors to point to and know they’re making a good investment.”
Those fundamentals should be a familiar checklist: the strong multifamily and retail markets making Center City an attractive destination for talent, which is coming out of University City and staying at historic rates. Although construction and labor costs are still prohibitively high, forcing any new construction to charge high rents, Schuylkill Yards looms on the horizon to deliver huge square footage in the University City office market.
“I would think [it’ll be the largest new office development in the city],” Hasenecz said, “and Cira Centre (below) has proved that University City has become a viable office market … With access to a talented and diverse labor force as well as 30th Street Station, it’s perfectly positioned in the marketplace to become a major economic driver for the city.”
A healthy office market is more than just its Class-A buildings, and there remains a large portion of Class-B buildings that, if redeveloped or revitalized, could fill a serious gap in the market in the years to come.
“There’s a number of buildings that need [to be updated],” Card said. “It may not have to be substantial, but the opportunity is absolutely there in certain locations. It’s just not enough to be in [a good location] to drive tenancy. You need amenities, a good lobby and good tenant experience, and a lot of the buildings are still in prior decades from that standpoint.”
So far, that market has been defined by creatively designed or otherwise unorthodox spaces, which appeal to companies below the law firm/banking tax bracket.
“The great thing about Philadelphia is it has a lot of interesting architecture,” Hasenecz said, “so buildings that wouldn’t normally be considered by office users can become a unique working environment, which will help companies attract talent.”
The complicating factor in that potential growth, and indeed the one economic change that seems certain, Trump aside, is the increase in interest rates. It could cool the market trading for existing properties, one that has to be active for renovations and redevelopments to happen. Yet for many investors, Philadelphia’s steady nature should provide a shield against any major swings.