By James Nelson
NEW YORK CITY—For the December 2016 of the Full Nelson, I had the pleasure of sitting down with Victor Calanog, Chief Economist & Senior Vice President at Reis, to discuss the impact of the Presidential election on the New York City real estate market.
JAMES: What do you have to say about the Presidential election results?
VICTOR: The downside seems to be out of the way. When it looked like Trump was going to win the election, the DOW was down 800 to 900 points, and low and behold the market was up the next seven to eight trading days. The markets appear to be taking a bet on greater economic activity resulting from things like infrastructure investments that tend to stimulate more economic activity, which is why the stock of companies like construction services rose anywhere from seven to 20 percent right when Trump was elected. Then the questions is whether or not inflation will come at its heels, which is why the 10- year Treasuries have been rising quite a bit as well.
JAMES: What impact does the election have on the real estate market?
VICTOR: I was saying that Brexit would be a nonevent for commercial property fundamentals, as well as pricing in the US. The US is perceived to be a safe haven on a risk adjusted basis, and superstar cities with real estate like New York and San Francisco are reaping a lot of those benefits given that they are real assets that are generating income. That is the overall context as to why a lot of the geopolitical upheavals that are having an effect on other countries are largely leaving us unaffected. The question has been raised, will a President that has a background in commercial real estate be good for commercial real estate? I think it seems to be leading that way in terms of where investors are placing bets. If there are deals to be had out there, people are waiting for more preferential tax treatments, if tax policies change. We don’t believe we will see the end of 1031 exchanges, so that will benefit a lot real estate investments. This is not going to lift all boats, but places like New York and San Francisco will likely benefit disproportionately.
JAMES: Do you think that foreign interest in New York will continue?
VICTOR: In relative terms, I suspect that if there are benefits to be had, if the economy keeps growing, if treasury rates don’t spike where the risk free rate is more attractive than riskier options, I suspect that any kind of foreign policy change and or boiling of the waters when it comes to how the US relates to the EU and other trading partners, a lot of that will probably be to New York’s benefit as opposed to its disadvantage. For example, if there is any kind of effect on Brexit on the property markets it is that it probably rendered London as a safe haven for foreign investment as less of an option. Where else will that kind money go? New York.
JAMES: We are witnessing a slowdown in sales in New York City. And we would think that this decline was a result of a lot of uncertainty. Now that we are post-election, how do you see sales activity for 2017?
VICTOR: Before the November elections we were not sure whether a Clinton or Trump administration would benefit or harm investments, real estate, or the climate in general. Now that we know Trump will be in office, what people are waiting for will be what changes to rules, regulations, need to be considered before making a commitment. I think many are waiting on the sidelines until they are familiar with said rules. Come January, all of these administrative changes will be rolled out in a more definitive way. I suspect you will see a burst of economic activity at the start of next year, and let’s see how 2017 pans out.
JAMES: If the 10-year treasury is up, what impact will that have on pricing?
VICTOR: If the 10-year Treasury rate rises past a certain level then you will see greater upward pressure on cap rates, and therefore possibly lower valuations. But, spreads are still relatively healthy. A 4 or 5 percent cap rate sounds low until you consider the fact that we were coming from a 1.8 to 1.9 percent 10- year Treasury. Therefore, a 77-80 bps rise in 10-year Treasuries does not worry me as much. On the other hand, if 10-year Treasuries climb to the 4 or 5 percent levels then you are looking at an investment comparison where you have got a 4-5 percent sure thing versus riskier alternatives like equities or commercial real estate. I am not worried right now, but November 9th really pushed 10-year Treasuries in a way that the Federal Reserve could not do for two years. It ended QE 3, it raised borrowing rates overnight in December 2014, it threatened to raise it again in December 2015, and still no real blip in interested rates until November 9th. So here we are.
JAMES: The overall development market is down substantially, and we believe it is a result of not having construction financing available. Do you think that Trump’s election might ease some of the restrictions and regulations on the larger banks?
VICTOR: It does look like the Trump administration is leaning towards less of a regulatory burden not just for real estate companies, but for banks in general. It is yet to be seen what kind of impact January will have on changes to regulatory burdens like HVCRE and a lot of the topics that construction financing folks are worried about. The buzz word is will the Trump administration provide us with a definitive roadmap on which we can hang our hats; whether it means we are writing checks to finance new development or banking on not just short term interest rate movements, but shovels in the ground two years from now on a one million square foot office building that won’t see the light of day until 2019. If we have that definitive road map, we will feel a little bit more confident about writing that check, and if not then we will probably hold back.