Real estate investors have not done well since a real estate mogul became president-elect in the US. It would be ironic indeed if Donald Trump were to preside over a slump in the commercial property market, but is that likely?
Shares of listed real estate companies are down almost 4 per cent since election night. The sharp rise in US bond yields has made the dividends on real estate investment trusts look relatively less appealing, and there are fears that higher borrowing costs will choke off the rise in property prices.
Meanwhile, the holders of bonds backed by commercial mortgages are also nursing losses, for similar reasons.
Property prices are almost certainly going to slow from the current rate. The 8 per cent growth in the past year, driven by a 14 per cent jump in apartment prices, seems too racy.
There was no shortage of potential headwinds, even before the jump in rates. Regulators have repeatedly warned banks to be cautious when extending commercial mortgages and another major source of funding, the CMBS market, could shrink when new rules on risk retention come into force on December 24.
Meanwhile, vast swaths of American retail space could be left empty by the consumer switch to online shopping, and signs exist of overbuilding in the hotels sector, particularly in the New York market that Mr Trump knows well. However, construction of new office space is only now starting to pick up, suggesting that the cycle has some way to go.
As for the rise in rates, the effect may not be as dramatic as some fear. Tad Philipp, director of commercial real estate research at Moody’s, pointed out in a report on Thursday that yields on commercial property are historically high relative to Treasuries, so there is room to absorb the higher rates within current prices.
Higher rates also may not materially change the outlook for delinquencies next year. The market is midway through absorbing a wave of pre-crisis mortgages that are coming due for refinancing, but those original loans were written at interest rates far higher than those that prevail today.
The prospects for the real estate market in 2017 are not as gloomy as they might first appear. And, of course, it always helps to have friends in high places.
