By Anthony La Malfa
Uncertainty was the prevailing sentiment in the months leading up to the Brexit vote, and continues to characterize the ripple effects now being felt across the globe. The quintessential British phrase, “keep calm and carry on,” has become a motto for many sectors, and real estate is no different. A court battle continues over the legality of invoking Article 50 without Parliament’s approval. Once invoked, the clock would start on a minimum of two years’ worth of “leave” negotiations. The U.S. real estate industry is just beginning to feel the initial aftershocks, but a few trends are taking shape.
Business as usual at home, but with caution
Despite rising property values, currency and market volatility are still dark clouds. Landlords are working against slowing sales and rising vacancy rates in office and multifamily units across the United States. As the Brexit negotiations continue, we can expect to see markets worldwide mirroring the hesitation and political pressure the EU and UK will likely experience.
Adding fuel to the fire, conditions in the U.S. commercial real estate debt market indicate the sector may be heading toward a slowdown. Moody’s Investors Service reported that more than 5.9 percent of the $390 billion in commercial property mortgages that had been packaged into securities were more than 60 days overdue in payments in September. The Wall Street Journal asserted that the default rate is a result of borrowers being unable to pay off 10-year loans that were issued before the 2008 financial crisis.
Introducing another layer of uncertainty to the U.S. markets, risk-retention rules will go into effect on Dec. 24 as part of a larger overhaul of the Dodd-Frank Act. These rules will require CMBS issuers (or a third party) to retain a minimum of 5 percent of the securities they create through securitization for 10 years, which could make borrowing a costlier undertaking.
Markets crowd, fueling exploration
Nervousness in the markets, combined with new rules ramping up requirements for security and identification for foreign buyers, has slowed sales in U.S. gateway markets, including New York, Boston and Los Angeles. In particular, high-end condo sales have slowed down in the New York City market. On the other hand, sovereign wealth funds are continuing to eye the U.S.
Prices had already reached high, perhaps even unsustainable, levels prior to the Brexit vote. More owners, landlords and investors are getting crowded out of gateway cities, and scooping up opportunities in secondary markets like Dallas, Austin, Chicago and the Carolinas. This trend usually starts with residential properties, then extends to other assets as well—currently we’re seeing a lot of deals for hotels, healthcare facilities and industrial assets. This situation could change if interest rates rise, as most predict they will in the short term.
Capital could migrate more amid U.S. election aftermath
While the presidential election is still freshly inked, assets could shift in the short term in the wake of President-elect Trump’s victory. We could see a dip in investment from the Middle East, and those investors could be looking to sell existing assets. If that does happen, it will be interesting to see where those funds are re-deployed. Potential targets include major metropolitan and business centers like Hong Kong and Singapore in the Asia-Pacific region.
This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com