CBRE RESEARCH | NOVEMBER 6, 2024
The second Trump presidency will usher in both opportunities and risks for commercial real estate. Several key areas are likely to impact real estate both directly and indirectly, including federal spending and the deficit, trade, taxes and immigration.
As of this writing, the Republicans have taken control of the Senate but the size of their majority is uncertain, with several close races still undecided. Control of the House may not be determined for some time, with more than 50 races yet to be called.
The size of the Republican majority in the Senate and which party controls the House will have some bearing on the extent to which the Trump administration can realize its policy goals. Nevertheless, the executive branch has authority over trade policy. Regardless of which party controls the House, the president will greatly influence the negotiations over the 2017 tax cuts, many of which expire next year.
Federal Spending
A Wharton Business School analysis1 indicates that a fully enacted Trump policy agenda would increase the federal deficit by $4.1 trillion on a dynamic basis (under which faster economic growth produces higher tax receipts). We believe the deficit will be smaller, as Congress will likely limit the extent of policies enacted; however, the inability of both parties to rein in spending will carry significant implications for real estate investors’ cost of capital. The recent rise in the 10-year Treasury yield is due in large part to the market’s concerns about current and projected federal deficit spending.
The more stimulative fiscal policy becomes, the more hesitant the Fed will be to cut short-term interest rates to keep inflation in check and the economy from overheating. However, the Fed’s concerns would be lessened if the administration and Congress find ways to curb spending and bring down the deficit. Trump’s plan to establish a task force focused on trimming wasteful government spending may be a start. But until then, continued bond market volatility likely will continue, as evidenced by the 10-year Treasury yield’s ongoing rise.
Trade
Trump has advocated tariffs on foreign-made goods to spur American manufacturing and job creation in the longer term. During the campaign, he proposed up to 20% across-the-board tariffs on all imports and at least 60% on goods coming from China. These proposals may be Trump’s opening bid in trade negotiations, and it is likely that many foreign governments will negotiate exceptions or lower tariffs. But some trading partners may retaliate with heightened tariffs on U.S. goods. Higher tariffs will lead to a stronger dollar and may lead to the imposition of controls on foreign capital invested in the U.S.
In the short-term, industrial & logistics leasing will rise as companies increase inventories before tariffs are instituted. Beyond this, the global economy could face a significantly increased headwind if major trading partners ratchet up tariffs on U.S. goods.
Such changes to trade policy will impact supply chains and the broader flow of goods, shifting industrial real estate demand to markets that facilitate trade with countries that maintain favorable trade terms with the U.S. For example, an increased flow of goods from Mexico (replacing products manufactured in East Asia) would lessen industrial demand in West Coast port markets but increase it in Southern port markets. On another front, North American supply chains are susceptible to changes to the U.S.-Mexico-Canada Agreement (USMCA), which is due to be reviewed in 2026.
More broadly, higher tariffs will raise the cost of consumer goods, likely shifting spending patterns and impacting retail real estate demand.
Taxes
Trump has proposed several changes to the tax code and suggested greater reliance on tariffs to fund the government. Although he will be unable to modify government funding mechanisms without congressional agreement, we expect the preservation of many 2017 tax cuts as well as potential changes to the cap on SALT (state and local tax) deductions. We also expect that existing corporate and capital gains tax rates will be preserved, as will the 1031 tax-free exchange provision.
In short, tax policy is expected to remain relatively favorable for commercial real estate occupiers and investors. One other area to watch will be opportunity zones. Trump established these during his first term, and we expect they may be part of any broader tax plans.
Immigration
Trump is insisting on stricter border controls and more robust deportation policies. This would reduce the labor supply fed by undocumented workers, which we believe has been a factor in the economy producing strong job growth even as inflation has fallen. Increased labor participation and productivity growth may partly offset the effects of more restrictive immigration policies. Nevertheless, there may be an impact on the overall supply of labor, which in turn affects monetary policy. Notably, there are still around 8 million unfilled job vacancies in the U.S. and the Fed will factor in labor market dynamics in its fight against inflation.
Sector Impacts
Office
CBRE believes that leasing activity and return-to-office rates will continue to improve. Greater certainty on the corporate tax rate will be a tailwind for leasing.
Industrial
We expect a short-term rise in leasing as retailers and manufacturers increase inventories ahead of tariffs. Over the longer-term, tariffs would ultimately depress demand. We expect trade negotiations to impact supply chains and the flow of goods, benefiting some markets and reducing demand in others.
Retail
Impacts will be subject to trade negotiations. Tariffs on all or most imported goods will lower consumption overall and shift demand for various products and services as consumers adjust spending. This will increase uncertainty and weigh on retailer sentiment.
Multifamily
Higher interest rates due to historically large budget deficits will exacerbate housing affordability issues. This in turn will likely keep many would-be homebuyers in the rental market, boosting multifamily demand.
The Bottom Line
The second Trump presidency will usher in both opportunities and risks for commercial real estate. The industrial and retail sectors will be particularly affected by trade policy and shifting consumer spending patterns. The fiscal policy mix will also have some bearing on the cost of capital. Prospects for unrestrained federal spending and historically high budget deficits could further drive up long-term interest rates, weighing on the nascent recovery in investment activity.
Some areas, such as tax policy, should be favorable for commercial real estate, while tariffs will likely boost short-term industrial leasing activity as companies build inventory ahead of increased tariffs. However, tariffs may constrain demand over a longer period. Additionally, a rise in long-term interest rates will exacerbate homeownership affordability issues, forcing more people to rent out of necessity.
We also expect that Trump will loosen regulatory burdens on industry, much as he did in his first term. Finance and energy companies stand to especially benefit from this approach, which can also aid economic growth, providing a tailwind for leasing activity. Additionally, Trump could take a tougher line on federal worker return-to-office policies, which could benefit the office sector in certain markets.
Although many Trump administration fiscal proposals may be moderated in negotiations with Congress (particularly if the Democrats regain control of the House), key elements of the 2017 tax cuts will likely be extended. The president will wield significant influence over budget negotiations next year and, on matters of federal spending and taxes, the Senate can approve legislation with a simple majority through the budget reconciliation process. Therefore, control of the House will ultimately be consequential for budget negotiations.
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