Our economies are way more tied together than ever before, and what happens across the Atlantic has material ramifications for what happens in the United States.
Since the United Kingdom’s vote to exit the European Union (EU) last week, now known the world over as "Brexit," the U.S. economy has seen immediate fluctuation in the markets, from sharp declines in banking shares to ripples across the broader financial system. According to Trepp Talk, regional bank shares dipped 4.4 percent while the largest banks lost 3.6 percent last week before stabilizing some this week. Some of the largest banks with global footprints, including JP Morgan Chase and Citigroup, fell further with weekly declines of more than 4 percent.
While the short- and long-term ramifications of the UK’s exit are unknown, U.S. banks overall are not showing signs of failure yet and capital ratios are above the minimums set by regulators, according to Trepp Talk. The second round of stress tests, which will be announced soon, will determine if the government has approved of the banks’ capital plans, as well as if there are any plans for dividend increases or share buybacks.
Right now, increased uncertainty remains in the market, both in the United States and globally. Will businesses postpone investments, new hires and expansion until there is a clearer picture of the impact of Brexit?
Year-to-date, U.S. commercial real estate lending has been growing solidly, with annualized growth for construction and land development at 14.7 percent, multifamily at 15.5 percent and commercial mortgage at 9.9 percent. Will investors see the United States as a safe harbor and flood the U.S. market with excess capital in light of UK instability?
Northeast Real Estate Business reached out to a few industry experts to get their take on the historic vote and how it may affect the U.S. commercial real estate industry.
Peter Linneman, principal of Linneman Associates; Ned Huffman, president of Bellwether Enterprise; Ernie Katai, executive vice president and head of production at Berkadia; and Ryan Severino, senior economist and director of research at Reis Inc.; and Brian Ward, CEO of Trimont Real Estate Advisors, provided some commentary.
Question: What impact, if any, will this vote have on the U.S. economy and commercial real estate lending in either the short or long term?
Linneman: I agree with the decision. In the short term, it creates uncertainty and overreactions, but in the long term it frees Britain’s domestic policies from being influenced by politicians from Greece, Italy, Spain and France. After all, would you like it if U.S. policies were partially set by Mexico, Guatemala, the Dominican Republic and Panama? Of course not. In the early days, the EU reduced economic regulations, but for the past decade it has erected them and increasingly focused on transferring income.
Huffman: The Brexit decision will likely create more investment dollars into the United States, as overseas investors look for safe havens and real estate opportunities in the United States. The influx of capital will result in lower cap rates, increasing the value of commercial properties. I don’t see it affecting one commercial property type more than another.
Katai: In the wake of Brexit, and in light of the uncertainty surrounding the vote, we are keeping a close eye on the market climate and monitoring possible increased interest rate volatility.
Severino: Markets detest uncertainty, and if U.S. commercial real estate and other real asset classes that offer reliable yield are perceived to be a relatively safe haven compared to options in the UK, then that will benefit demand for real assets in the United States in the near term. Currency fluctuations will mitigate that somewhat as the British pound’s decline will render UK properties more affordable, but I suspect most investors will want to wait and see how the UK and the EU end up stumbling through the unfolding schism. If the United States is perceived to be a safe haven — and U.S. commercial real estate along with it — then expect a stronger U.S. dollar, especially against the pound and Euro, and downward pressure on U.S. yields, including commercial real estate.
Ward: The long-term impact from Brexit is impossible to predict. However, the near-term consequences are clearer. For the United States, the Brexit Referendum will have no material adverse impact on commercial real estate volumes or values in the near term. Conversely, I think the Brexit Referendum will enhance the already elevated demand for U.S. commercial real estate assets from foreign investors. We have been seeing this progression over the last 18 months, as foreign investors shift from “yield-motivated investments” to “capital preservation”. Many foreign investors today are viewing their U.S. commercial real estate investments more as a “fixed income” play, similar to investment-grade bonds.
Other Factors to Consider
Severino noted that the slower developing storyline that may undermine these near-term predictions is how the cloud of populist uncertainty is perceived by the market.
“How will this exit affect what Americans will do in November and does this mean more or less uncertainty for the United States and the EU as a whole?” asks Severino. “There are other options out there, and there is early evidence that countries like Japan, however moribund its economy has been, are benefiting from the turmoil of Brexit more than United States, as the Japanese yen is up strongly against the U.S. dollar right now.”
Another consideration is the immediate impact on the U.S. monetary policy. Ward explains that the Brexit Referendum increases the potential for contagion risk from both the UK and other EU members.
"Our economies are way more tied together than ever before, and what happens across the Atlantic has material ramifications for what happens in the United States. As such, the U.S. Central Bank's hands are essentially tied on further rate increases this year given the U.S. dollar is already increasing because of Brexit and other global uncertainties," adds Ward. "Brexit increases global uncertainties, and unpredictability is no friend to global capital markets or longer term, stable investment strategies."
— Amy Bigley Works
About Trimont Real Estate Advisors
Trimont Real Estate Advisors (trimontrea.com) is a real estate financial services provider with more than $118 billion of client assets under management, providing services to commercial lenders and investors since 1988. Trimont is the leading provider of asset management, servicing, due diligence and advisory solutions to commercial real estate clients around the world. The firm has approximately 230 employees among six offices in Atlanta, Dallas, Los Angeles, New York, London and Amsterdam. From these offices, Trimont has managed more than 21,000 assets and provided services to clients in 61 countries.
Trimont is a highly rated primary, special, and construction servicer, with particular expertise in repositioning and development deals. Trimont is rated by Standard & Poor's as a Commercial Mortgage Special Servicer (Strong) a Construction Loan Servicer (Strong), and Commercial Primary Servicer (Above Average). It is rated by Fitch as a Primary Servicer (CPS2+) and a Special Servicer (CSS2), and by Kroll Bond Ratings, Inc.