Commercial real estate investing in a post-Trump election world
Dealing with the tangle of contradictions in our new POTUS
February 5, 2017 BY IAN IPPOLITO
(Usual disclaimer: I’m just an investor expressing my own personal opinion and not a financial advisor. Consult your own financial advisor before making any investment decisions).
The election of the unconventional new U.S. president, Donald Trump, presents a conundrum to investors.
On one hand, he made many pro-business campaign promises ($1 trillion in new infrastructure spending and decreased regulation of the financial and energy industry industries). On the other, he made many business killing promises too (an employment killing trade war, government interference in the free market for low-skill manufacturing labor, etc.). And some promises appear to be both friendly and unfriendly at the same time (massive tax cuts but without matching increases in revenue to pay for them, resulting in equally massive increase of new debt).
Not all roller coasters are fun
Stock market investors have been on a roller coaster. In the wee hours of November 16, they were in shock and sent the futures market spiraling down. Then their nerves steadied, and in the 3 months that followed they focused on the pro-business promises. The stock market rebounded and rallied to a new high. More recently, they've gotten nervous again as the business unfriendly campaign promises appear to be unlikely to be swept under the rug. Stocks again are dropping. There will probably be much more volatility to come.
Commercial real estate investors have also had a turbulent time. Real estate prices are driven by the financial cycle, and long-term interest rates (the 10 year treasury) is one of the key drivers. During the stock market rally, the 10 year treasury rose to a multi-year high, which makes it more expensive and harder to finance properties and causes prices to drop. As a result, many transactions were delayed or canceled. After Trump appeared to be serious about the trade war promises, they fell again (although not to the levels before the election). Again there is probably more volatility to come.
Keeping your eyes on the prize
So how do you invest in such an environment? Here's what I do:
1) Keep a close eye on the financial cycle. If the 10 year treasury rate starts to go too high, expect prices to start dropping.
The Federal Reserve is also a factor here. They are expected to raise rates several times this year, which can indirectly increase the 10 year treasury.
An even bigger concern is that the Fed is expected to start selling their stockpile of government bonds purchased through quantitative easing program. These were purchased to drive down interest rates, including the 10 year treasury. Most likely selling them will increase rates. Also watch real estate sales volumes. If they start to go down significantly, that's also a warning sign.
2) Keep a close eye on the economic cycle. Rents go down in recessions, and vacancies increase reducing income and driving up turnover costs. If we enter a recession, expect income on investments to drop.
Trump-card or trumped?
So, how does a Trump presidency affect these factors?
The pundits have been out in force answering this question. They are confidently predicting either wonderful things or calamity or a combination of both. In my opinion, no honest person can confidently predict at this point, and all their predictions are useless for creating a realistic strategy.
Can't hide from the numbers
Republicans control the presidency, the House and the Senate. However, the Senate is only by a slim majority (51 Republicans versus 48 Democrats) and passing most new legislation requires a filibuster proof 60 votes. This means, that Republicans need Democratic help to pass any new laws. Additionally, the president and Republicans in Congress have many diametrically opposed viewpoints on many issues.
For example, the most (short-term) pro-business campaign promise is the $1 trillion infrastructure spending program. This would create hundreds of thousands of new jobs which should be positive for the short-term economic cycle. However, congressional Republicans ran for 8 years on fiscal responsibility, and there is no new revenue to pay for this. Already, the Koch brothers, conservative tax groups and other fiscally conservative groups are threatening to withhold money from senators who vote for this. So it's future is extremely uncertain as different groups jockey for position. We're in uncharted territory, and no honest person can claim to accurately predict what will happen.
The most frightening campaign promise to business is of a trade war. Trump, a populist, campaigned heavily on 25% and 35% tariffs on Mexico and China, and tearing up trade agreements. However, fiscally conservative Republicans are aghast at the anti-free market rhetoric. Moody's estimates a full out trade war would cost 4-7 million jobs and throw us into a recession). So again there is jockeying for position on both sides. And complicating the issue is that there are some things that Trump can do without legislation and others that he cannot. Additionally, he has a history of bending the rules in surprising ways to obtain his objectives, so the line is blurrier than normal. So how is it going to end up? Again, at this point no honest person can claim they can accurately predict it.
And there are literally hundreds of other issues that are equally ambiguous at this point.
So what does this mean for your real estate investing? In my opinion, we are now in one of those rare points in history where the uncertainty is so high, and the different possible outcomes are very radical.
In such a situation there is no way to safely bet on anything. So unless you *have* to deploy your money, it makes no sense to do so right now. I myself have suspended all new major investments for 100 days, at which time it will be much clearer which groups are winning, and where things are going. To me, this is the only prudent thing to do in such an environment.
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About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.