THE TRUMP EFFECT on MULTI-FAMILY
Article by Peter Strauss of Iconic Investments.
Iconic Investments attended the UCLA Anderson Economic Forecast on March 8th, 2017. The theme was “Tweetonomics”, which was a continuation of the December Forecast entitled “Trumponomics”.
Post-election and post Trump taking office, Wall Street has reacted positively to the expected $5 trillion of tax cuts over the next 10 years. It's anticipated that the tax cuts will begin in First Quarter 2018. The cuts are designed to trigger a jump in GDP growth of 3% in 2018. Although Wall Street is bullish on the economic policies, the bond and currency markets are more skeptical.
Multi-Family & the New President
Housing development and the potential effects of Trump's policies on affordable housing were discussed by UCLA economist and professor Stuart Gabriel, director of the Ziman Center for Real Estate. He addressed the question of whether or not there is too much housing.
When we drive through Los Angeles and other densely populated submarkets in California, we see a lot of construction of new Class A multi-family projects. The big question: Will the supply meet the demand?
According to Gabriel, over the last four years, the sentiment among multi-family developers has remained strong and consistent with developers churning out new Class A product. The sentiment, however, has changed recently.
Class A developers are now far more cautious as they fear the market has topped out and become over-built for high-end units. There is strong demand for multi-family housing - but not high-end. The costs of land and construction in coastal cities steer developers away from building non-Class A since the numbers will not pencil.
Gabriel stressed there is a dire need for affordable housing in Los Angeles. Low-income and very low-income tenants spend +50% of their income on rent. Two of Trump’s fiscal policies could greatly impact new and existing affordable housing:
- The US Federal Corporate Tax Rate, at 39%, is the highest of all countries. Trump's planned cuts to the corporate tax rate will greatly reduce the value of affordable housing tax credits, possibly reducing the number of affordable housing projects planned. Developers rely on selling the tax credits to make their projects pencil.
- The federal budget policy requires parity between defense and non-defense spending. If the policy is changed, as planned, and a larger percentage of the budget is spent on defense, this will reduce the number of affordable housing vouchers and reduce the number of affordable housing units.
Arden Realty Chair Stuart Gabriel's Predictions
- Fed Funds Rate Hikes: 85% chance the Fed will increase the fed funds rate in March, taking away “the punch bowl”
- Fed Funds Rate: Will be 3% by Fourth Quarter 2018 (currently 0.75%)
- Mortgage Interest Rates: Will be 6% by Fourth Quarter 2018
- The 10-year Treasury: Will be 4% by Fourth Quarter 2018 (currently 2.53%)
- GDP Growth: Temporary growth in GDP to 3% in 2018, then back to anemic 2%
Senior UCLA Economist David Shulman’s Predictions
- Fed Funds Rate Hikes: Four to five rate hikes in 2017
- Unemployment: Economy is at full employment (4% unemployment); no slack in the market
- Inflation: Moved above the Fed's target; it's now over 2%, he expects it to increase to 2.5% - 3% moving forward
- Multi-Family Housing Starts: Stalled, reinforcing developers’ reduced appetite for new projects
Outlook for Multi-Family Values
Iconic got a chance to speak with Stuart Gabriel after the forecast to get his opinion on Class B and Class C multi-family buildings in Los Angeles. While some forecasters predict rents will grow by 5% per year over the next five years, Gabriel feels that is too aggressive. He thinks rents will grow by 3% annually. With the housing supply falling behind population growth, there is huge demand for apartments. He expects only Class A buildings will continue to see rents decline as more product comes online.
Iconic also asked Gabriel for his prediction on values if interest rates hit 6% by 2018. Will the currently low cap rates be acceptable to buyers, requiring larger down payments to offset increased debt service? Or will cap rates increase, causing apartment values to decline? He predicts that the rent growth of 3% will not be enough to maintain values. The higher interest rate will lead to higher cap rates, leading to declines in values.
Iconic Investments
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Iconic Investments is a Los Angeles-based boutique commercial real estate brokerage firm focusing on apartment buildings of 15 to 100 units throughout Los Angeles in all different sub-markets. Iconic represents multi-family property owners in dispositions, acquisitions, and 1031 exchanges.
Iconic Investments attended the UCLA Anderson Forecast presentation on December 6, 2016. The main theme of the 2017 forecast was “Trumponomics” - how Donald Trump's fiscal policy will affect the US economy, and the elements of his plan. Post-Election, the financial markets have seen an immediate and sharp rise in the stock indices,