Uncertainty dominated the commentary written by key real estate analysts trying to forecast how the apartment industry and economy overall will be affected by the election of Donald Trump as the next U.S. President.
Most industry groups, admittedly, said they were caught off guard by the result, and they, no doubt, will continue to analyze the situation between now and January’s Inauguration Day.
The fact that Trump has never held a public office and that many say he manages impulsively, among other things, has caused most to suggest there is an even greater factor of unpredictability going forward.
Writes columnist Michael Gerson in The Washington Post, “Hillary Clinton proved incapable of defeating a reality-television host whom more than 60 percent of Americans viewed as unfit to be president.”
The election’s result has created a rare one-party, four-way control of the federal government (House, Senate, Executive and Supreme Court) and the continuation of the GOP’s domination of state governments and governor houses. (See “By the Numbers.”)
Adds columnist Eugene Robinson, writing in The Washington Post, “Some of the nation’s most diverse and populous states, including Texas and Florida, are living under one-party Republican rule.”
New York Post columnist Kyle Smith points out, “What kind of president will Trump be? It’s a tad too early to say, isn’t it? The media are supposed to tell us what happened, not speculate on the future.”
While it certainly is too soon to speculate what impacts the Trump Administration could have on the industry and the broader economy, following is a summary of thoughts and projections expressed during the 12 days following the Nov. 8 election.
Apartment Market/CRE Fundamentals
KC Sanjay, Senior Real Estate Economist, Axiometrics, believes the apartment market will perform well during Trump’s first term with average occupancy rates close to 95 percent and rent growth exceeding 3 percent from 2017-2020.
“New supply is expected to average about 330,000 units per year during the same time period,” Sanjay says. “But higher GDP and job growth, as Trump predicts will happen, could mean rent growth and occupancy increase by an extra 50-100 basis points.”
“It’s important to remember that many economists have a mild recession built into their models within the next 18 to 24 months, regardless of who is at the helm,” Paula Munger, NAA Director Industry Research and Analysis, says. “That’s obviously a downside risk to the apartment industry, but the demographic fundamentals are still pretty solid.”
“The economic cycle kicks in no matter who is president,” Sanjay writes. “The current economic expansion has lasted more than seven years, and the longest expansion period on record was 10 years. That means the business cycle is pointing toward a downturn in the not-too-distant future.
“Also, a recession has always occurred within 12 to 36 months (an average of 24 months) after the unemployment rate falls below the natural rate of 5 percent-it was 4.9 percent in October. So, it is likely a recession-albeit mild-will occur by the end of 2018.”
Concisely, Sanjay adds, “We expect the apartment market-and the economy-to be generally positive during the next four years, even though unexpected outside shocks could muddle things up.”
The Real Estate Roundtable, one of the CRE industry’s most active lobbying groups, said in a statement that the major planks of tax and financial regulatory reform, infrastructure investment, immigration issues, energy policy and physical and cybersecurity will all present opportunities to advance the economy and the stability of U.S. real estate markets.
According to Roundtable CEO and President Jeffrey D. DeBoer, “Real estate public policies are non-partisan. They should be based on objective economic principles, responsive to changing economic cycles and sensitive to societal demands.”
John Kevill, Avison Young Principal and Managing Director for U.S. Capital Markets, says, “Despite all the noise, Trump in my mind won on a promise of growth. His proposed infrastructure spending, plans for lower taxes, moving jobs back and a target of 4 percent growth all speak to that.
“If it appears that things are starting to happen in that regard, expect CRE investment to follow as yield will look to be relatively attractive. For now, investors will be hanging on his every word and every appointment until late January and not making too many major bets.”
Determined Advocacy Goes Forward
One sure bet is that NAA will work with the new administration.
Gregory S. Brown, NAA Senior Vice President of Government Affairs, says, “The outcome of the 2016 elections has dramatically changed the political landscape in Washington and the outlook for policy priorities of the apartment industry. We have one-party rule for the first time since 2010. That could mean accelerated consideration of numerous high priority Republican policy priorities, some of which impact the apartment housing industry. NAA looks forward to working with the new Administration, newly-elected members of Congress and returning incumbents of both political parties on critical housing concerns like flood insurance, tax policy and regulatory reform.”
Immigration and Apartments
Sanjay adds that stricter immigration laws are imminent. In the short-run, displacement of population could reduce the national consumption side of the GDP equation. For the apartment market, more immigrant renters may double up, reducing occupancy.
“Over the past 10 years, approximately two-thirds of new renter households were foreign-born and minorities,” Munger says. “Stricter immigration policy would absolutely impede that growth moving forward, but we just don’t know how much yet.”
Tax Policy: Individuals, Business
Randyl Drummer, CoStar, Senior News Editor, Los Angeles, writes, “Most of president-elect Trump’s proposed policies on corporate, individual and foreign taxes have been widely embraced by the real estate and financial industries, with the exception of Trump’s vow during the campaign to scrap the deduction for carried interest income.”
Drummer adds that previous guidance provided by the Trump campaign reported that Trump’s tax reform plan would reduce marginal tax rates on individuals (top rate of 25 percent) and businesses (top rate of 15 percent), increase the standard deduction to nearly four times current levels, and put a cap on existing tax breaks other than mortgage interest and charitable giving.
“Regarding real estate ownership and investment, Trump said he would tax long-term capital gains at a maximum rate of 20 percent, impose a ‘reasonable cap’ on the deductibility of business interest expense, and tax carried interest as ordinary income,” Drummer writes.
Economic Impact for Consumers
Economists considered that potential Trump policies could put additional dollars in consumers’ pockets and therefore increase consumption to help boost GDP, and perhaps job growth. This would occur, for example, through potentially less cost for health care (for citizens and employers), child-care tax credits and higher wages for low-skilled workers.
Randyl Drummer, CoStar, Senior News Editor, Los Angeles, suggests that these job sectors should improve during the Trump presidency.
“With plans to increase active duty military personnel and scale back international alliances, increased spending is likely to provide a boost to defense and aerospace industries,” Drummer writes.
Again, based on Trump’s campaigning, rust-belt industrial areas and auto manufacturing areas such as the Southeast (because of the potential for higher tariffs on auto imports) could get a boost, many say. Apartment investors and developers should take note.
Carried Interest Concerns
“Most of President-Elect Trump’s proposed policies on corporate, individual and foreign taxes have been widely embraced by the real estate and financial industries, with the exception of Trump’s vow during the campaign to scrap the deduction for carried interest income,” Drummer writes.
Drummer adds that previous guidance provided by the Trump campaign reported that Trump’s tax reform plan would reduce marginal tax rates on individuals (top rate of 25 percent) and businesses (top rate of 15 percent), increase the standard deduction to nearly four times current levels and put a cap on existing tax breaks other than mortgage interest and charitable giving.
“His tax plan would repeal both the alternative minimum tax and the estate tax,” Drummer writes. “Regarding real estate ownership and investment, Trump said he would tax long-term capital gains at a maximum rate of 20 percent, impose a ‘reasonable cap’ on the deductibility of business interest expense, and tax carried interest as ordinary income.”
According to a widely cited report by the Tax Policy Center (TPC) of candidate Trump’s tax proposal, it would “… reduce federal revenue by $9.5 trillion over its first decade and an additional $15 trillion over the subsequent 10 years, before accounting for added interest costs or considering macroeconomic feedback effects,” Drummer writes.
“Supporters of this tax reform contend that the cuts will stimulate economic activity that will offset the projected revenue losses,” Drummer adds.
What About GSEs?
The issue that might have the most direct impact on multifamily is the fate of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The GSEs guarantee covers almost all of the residential mortgages and nearly half of the multifamily mortgages originated.
Paul Fiorilla, Associate Director of Research, Yardi Matrix, in an article that appeared in Multi-Housing News, writes, “Trump did not talk about housing finance leading up to the election. Republicans in general are less inclined to see the need for the GSEs to backstop the housing finance industry, but Republicans are not in agreement on a solution. In recent years, Sen. Mike Crapo (R-Idaho) introduced a bill with Democrat Tim Johnson (former senator for South Dakota) that would involve a gradual wind-down of government involvement, while Rep. Jeb Hensarling (R-TX-5) has proposed legislation that would eliminate the GSE guarantee except as it relates to affordable housing. How easy it will be to eliminate the GSEs and what system will replace it is a big question, since virtually all home mortgages and a significant portion of multifamily mortgages originated today are backed by the GSEs.”
Cindy Chetti, Senior Vice President of Government Affairs at NMHC, says in the Multi-Housing News article, the shape of GSE reform could depend on the identity of the new Treasury secretary. “We want to make sure that no matter how they go forward here, that they look at multifamily and understand its unique characteristics” relative to the single-family market, according to Chetti.
Hensarling met with Trump in the week after the election. Some speculate that the U.S. Treasury Department was a topic of conversation.
This article and more can be found at National Apartment Association