— By Sunny Sajnani
There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. What will the newly inaugurated President (i.e Landlord-in-Chief) and his policy platform do to for the real estate markets (specifically the CRE capital markets)? Here are few areas that Trump will most likely take on to create stimulus in our industry:
- Trump has been very clear on his intent to ease banking regulations and financial industry reforms. There are two specific areas of regulation that could be targeted which will directly impact commercial estate lending: (i) CMBS risk retention rules that were introduced as part of Dodd-Frank, and (ii) High Volatility Commercial Real Estate (HVCRE) rules as part of Basel III. Though a full repeal of these banking regulations is unlikely, we should expect to see them loosened during the Trump presidency.
- Trump has also been very vocal about his intent to invest heavily in the country’s national defense and infrastructure (including roads, bridges, airports, etc.). Immediate increases in infrastructure spending will provide additional stimulus to the economy, and most likely prolong the current CRE growth cycle into the 10th, 11th or even the 12th inning. The additional spending on infrastructure should further create more jobs which will automatically result in tax revenue.
- INTEREST RATES. This direct boost to the economy will likely cause faster GDP growth, some level of inflation and continually push interest rates upwards. History indicates that real estate tends to do well during periods of high growth and rising interest rates. In the long term, this inflationary growth could lead to increased rents and healthy capital gains on real estate investments. These factors should serve to increase the value of REITs and other real estate equities.
- TAX CUTS/REFORM. Trump has been proposing to reduce the number of tax brackets and cut the top marginal income tax rates. This would be paired with a potential double-digit decrease on the business tax rates. It also appears that the Trump administration will take action to preserve portions of the tax code that are highly advantageous to real estate developers, examples being 1031 tax-free exchanges, depreciation and the carried interest exemption for investment managers.
In summary, most real estate industry professionals believe that President Donald Trump, a long time real estate mogul, will likely be a friend to the industry over the next few years. Unfortunately, we will have to wait to see how commercial real estate shifts in response to the new administration. In the meantime, Metropolitan Capital Advisors is going to monitor market trends closely to make the most educated capital decisions in this time of “huuuuuge” change.
The author, Sunny Sajnani, is a Principal & Director in the Dallas office of Metropolitan Capital Advisors.