Dodd-Frank...You're FIRED!

We've all seen the reports online: Trump is going after Dodd-Frank! And for most of us this is great news. This will enable mobile home park owners to continue to offer their mobile home park renters the opportunity to own their own home without the strangling regulation, and make room for greater possibilities to create great opportunities through lease-options.

Last week we focused on the SAFE Act and the excellent knowledge of SAFE Act expert, Spencer Roane, which he presented at the recent SECO Conference. Until we know for certain what will happen during the Trump Presidency with Dodd-Frank, we must still be educated on how to ensure we stay in line with regard to lease-options on mobile homes. If you missed that issue, you can still read it by following this link: Playing It Safe with the Safe Act

A number of reports and op-ed articles have surfaced about what the Trump Presidency means for commercial real estate, but we would like to present to you exclusively distributed information from our most trusted source: the leadership in the research department at Marcus & Millichap. Here are the highlights:

Current State of Job Growth Entering into the New Administration Term

  • A tight labor market and prospects of 2.0-2.5 million new jobs over the next year, if sustained, will support commercial real estate demand, tight vacancies and sturdy rent growth.

  • The potential of reduced taxes, increased infrastructure spending and deregulation could give the economy a boost over the short term. While more rapid economic growth could spark inflationary pressure and push interest rates higher, the acceleration could also generate more jobs and stronger wage growth, both positives for the commercial real estate sector.

For commercial real estate, change with the Trump Administration will likely emerge in five areas:

  1. Fiscal Policy: tax cuts but elimination of many deductions, increased investment into infrastructure, elimination of carried interest, some developers and investors may reconsider their business structure.

  2. Infrastructure: dramatic planned increase resulting in jobs and efficiency, projects would vie for funding and benefit surrounding commercial real estate, potential funding hurdles may change how projects are financed.

  3. Monetary Policy: Accelerated economic growth and ensuing inflationary pressure could prompt a quicker pace of rate hikes that are potentially more aggressive than exhibited over the past year.

  4. Regulatory Policy: reduction of regulations such as Dodd-Frank which would encourage more transactions but potentially threaten consumer protection, rollback of environmental restrictions to allow for extraction and utilization of in-country natural resources.

  5. Trade Policy: future trade agreements carry more protectionist tone, bolster to American manufacturing and employment, crimp in imports/exports, increase in U.S. dollar value offsets rising cost of foreign goods.

Investor Considerations for a New Administration

The potential for modifications to taxes and trade policies, explosive infrastructure spending, accelerated economic growth, rising inflation and an elevated interest rate environment give pause for commercial real estate investors to consider the following:

  • Inflation risk will affect asset performance and values. Review lease escalations.

  • Rising interest rates could influence cap rates and property values. Carefully consider investment strategies.

  • In-process transactions, refinancing and all existing debt should receive a close review ahead of potentially rising rates.

  • Accelerated infrastructure development, particularly roads and transit, could significantly influence property values.

  • Protectionist trade practices will impact commercial real estate, particularly in cities near ports of entry.

  • Opportunistic investors may be reinvigorated by changing climate.

  • Changing tax environment could influence yields. Merits close monitoring.

In conclusion, if the Trump Administration can successfully live up to its plans, the future looks quite bright for commercial real estate investing and opportunities. There is some concern that rapid economic growth could be a double-edged sword, which may come with inflationary pressure resulting in rising interest rates. AS John Chang, the First Vice President of Research Services for Marcus & Millichap states in closing: "Commercial real estate tends to perform comparatively well in such environments as it offers some inflation resistance through rent increases either upon renewal or by infl ation-adjusted lease agreements. Should interest rates rise quickly, the bid/ask spread could widen further as buyers recalibrate pricing based on rising capital costs. This would apply upward pressure to cap rates."

But, with hope and potential filling our vision, as we like to say here at McAnuff Group: Onward and upward!

To secure a copy of the full 4-page report, as a printable PDF, please visit our news and publications page.

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