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Category ArchiveJanet Yellen

Surging Economy, Lack of International Travel Could Hamper Hotel Sector

The United States economy is as robust as it’s been in decades.

The Bureau of Labor Statistics reported last week that the country added 200,000 jobs in January, which exceeded expectations and marked 88 straight months of job growth; the unemployment rate has remained steady at 4.1 percent for the last four months—its lowest level in 17 years; average hourly wages for private sector workers climbed 2.9 percent on the year—the strongest year-over-year shift since June 2009—and 0.2 percent from the previous month.

Historically, a strong economy has spurred strong travel and tourism numbers that boost the hospitality real estate sector—led by domestic travel and buoyed by international travel, which has been a mainstay export for the U.S. for years.

For the last two years, however, the trajectory of international travel has dipped significantly, and the U.S.’ current economic standing, coupled with its turbulent political environment, has some hospitality industry professionals and economists noticing some fractures that could negatively impact the sector.

“International tourism is definitely down,” said Chris Muoio, a senior quantitative strategist at real estate research firm Ten-X. “It’s affecting select, gateway markets disproportionately, and it’s really coming at a time when these markets have seen large expansions in supply. It’s not drastic right now, but it’s definitely having an effect.”

The U.S.’s total market share of long-haul travel fell to 11.9 percent last year, down from 12.9 percent in 2016 and from 13.6 percent in 2015, according to the U.S. Travel Association. The U.S. was joined only by Turkey—a country currently in political turmoil, having faced a military coup on July 15, 2016—as the only two countries out of the world’s top 12 destinations to have seen a significant drop in inbound international travel over the last two years—Turkey (6.7 percent) and the U.S. (6 percent). In comparison, Saudi Arabia saw its arrivals climb 20.3 percent from 2015 to 2017.

Nine of the U.S.’s top 10 source countries for international arrivals reported significant declines from 2015 to 2017—the only country whose travelers didn’t soften on the U.S. as a vacation destination was South Korea, which reported no change, according to data from the travel association. Had the U.S. maintained its market share of visitors, the hospitality sector would have had $32.3 billion in additional spending and 100,000 more jobs. In a separate report from the Commerce Department in early January, traveler spending fell 3.3 percent in 2017—through November 2017—equating to $4.6 billion in losses and 40,000 lost jobs.

“I think the damage is done,” Muoio said. “Even if the White House softens and changes its message, I think international travel sees right through it. As long as this administration is in place, I think there’s going to be a tepid, cooler response toward traveling to the U.S. It’s just become a less desirable destination based off the rhetoric and attitude that’s been put out there.”

Muoio added, “I don’t see tourism rebounding significantly unless [the U.S. dollar depreciates against other currencies]. It would honestly depend on whether [President Donald Trump] gets a second term. Four years of this attitude isn’t lasting, whereas a decade is more lasting. It’s definitely having a chilling effect on hospitality.”

Despite the losses in international travel, the hotel sector has remained steady for some time. Average daily room rates (ADR) have hit an all-time high—although it’s slowed considerably since 2014, according to data from research firm STR.

Revenue growth declined year-over-year in the first quarter of 2017 for the first time since 2010—although it was a small drop—caused by a slight dip in demand, stagnant occupancy levels and continued increases in hotel room supply across the U.S., according to an August 2017 report from Wells Fargo. Occupancy levels at a national level have been flat since 2014, hovering around 65 percent, and supply growth dipped, but the number of rooms still reached a record-high level in the second quarter of 2017, according to data from STR.

“In the last handful of months, we’ve signed up or executed on a few billion dollars in hotel deals,” said Dustin Stolly, the vice chair and co-head of Newmark Knight Frank’s debt and structured finance group for the New York tri-state region. “We’re seeing significant interest in financing hotel assets at all levels of the cycle, from fixed-rate assets that have stabilized cash flow to assets that have come out of renovations where lenders have gauged forward projections. Investors are definitely starting to look at hotels and be more active.”

In June 2017, STR reported it expected supply to outpace demand by 3 basis points on the year—3 to 2.7 percent—which could drive down room rates and create a cash flow issue should there be an economic downturn. Mike Barnello, the president and CEO of Bethesda, Maryland-based LaSalle Hotel Properties, told Commercial Real Estate Direct in June 2017, “When we get to this part of the cycle and we see the supply move up and continue to ramp and demand soften, that’s when we get more and more concerned.”

Demand from leisure travelers—heavily domestic—who book individually has climbed 37 percent while group bookings have seen tepid growth at 2 percent, according to a September 2017 U.S. lodging industry overview report from Cushman & Wakefield.

“Things are great right now, but back-to-back [down years for international travel] creates a concern that can be turned around,” said Chip Rogers, the CEO of the Asian American Hotel Owners Association. “We have a president who’s a hotelier. He could spread a message that America is open for business. International travel is the best and cleanest export that we have and creates and sustains many, many jobs in the U.S. If the message is the U.S. is the greatest place to visit, we would be very happy.”

That is exactly what Trump tried to say in front of a crowd of about 1,600 at the World Economic Forum in Davos, Switzerland, on Jan. 26, when he declared the U.S. is “open for business, and we are competitive once again,” touting the future of the U.S.’s energy and manufacturing exports. That assertion, however, doesn’t ring true in the hospitality sector.

Just a few days before the one-year anniversary of Trump’s inauguration, 10 business and trade associations—including the American Hotel and Lodging Association (AHLA), the Asian American Hotel Owners Association (AAHOA), the U.S. Travel Association as well as the U.S. Chamber of Commerce—created a travel industry group called the Visit U.S. Coalition that’s aimed at staving off and reversing the U.S.’s growing unpopularity as a tourist destination.

“We are certainly concerned about the statistics,” said Craig Kalkut, the vice president of government affairs at the AHLA, who added that his organization is also concerned about smaller hotels near national parks that could be affected by the loss of revenue from international travelers. “It’s important for the hotel industry but also the businesses that surround [and occupy] hotels and the economy overall, so it’s time to take some action. We want to head this off and turn things around as best we can. All these associations are nervous enough that they want to be involved. We want a more welcoming message for the world, and we want to turn things around.”

Some members of associations within the Visit U.S. Coalition acknowledged the negative impacts of certain policy initiatives and rhetoric from the Trump administration but also pointed to indicators such as the strong U.S. dollar as a main culprit for the downturn. The U.S. dollar is at its weakest point in almost two years, having fallen 0.07 points to 89.16 on the U.S. Dollar Currency Index as of Feb. 4—its lowest level since November 2014, after peaking from a high of 102.15 on March 3, 2017—although it still remains strong against foreign currencies.

“When we look at the last five to 10 years, international tourism has been a hockey puck,” said Patrick Denihan, a co-CEO of hotel developer Denihan Hospitality Group. “I would say that right now we have no concern [about the dip in international travel], but I do have a concern in the way the administration is dealing with immigration. Ten to 12 percent of our business is in the international market.”

Denihan added, “It would be nice if the current administration were taking a different position. How much stronger would it be? I don’t know. But, we always like to have more business if we can get it.”  

The tight labor market, coupled with potential wage accelerations for hotel service employees—who are typically on the lower end of the wage scale—as well as potential tax hurdles for some markets, could also have an affect on operating costs.

“If the health of the labor market shifts and wages stagnate or contract, hotel fundamentals are the first to turn because of consumer spending,” Muoio said. “I would say the downside risks are bigger than the upside risks in terms of hotel operating. If there’s a downturn shock, this current supply overhang becomes a larger problem.”

Major indexes have taken a step back after getting off to a fast start to kick off the year, hinting that volatility has risen as strong wage figures have created some concerns about a pickup in inflation and a subsequent tightening of monetary policy. Outgoing Federal Reserve Chair Janet Yellen went so far as to question commercial real estate prices on CBS’ Sunday Morning in an interview recorded on Feb. 2, saying asset prices in general are “quite high relative to rents. Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

It remains to be seen what could come of the hospitality sector, should an economic downturn swing into effect and domestic tourism take a hit, but one thing holds true: International tourism will not be there to help pick up the slack.

“We think this a great time to reverse this [downward travel] trend. For the first time ever, we have a hotel owner as a president,” Rogers said. “He has the largest platform of communication in the world with the ability to champion travel. He knows what it means to put more heads in beds.”

Source: commercial

Citing Customer Abuses, Regulator Orders Wells Fargo Not to Grow

Wells Fargo, America’s largest originator of commercial real estate loans, was shackled into unprecedented regulatory handcuffs on Friday, when the Federal Reserve condemned the bank’s leadership for allowing a series of sales scandals to fester unchecked.

The measure, submitted to the company’s board of directors on the last day of Janet Yellen‘s tenure as the Fed’s chairwoman, prohibits Wells from growing its balance sheet beyond its size at the end of 2017. The order is indefinite, pending the Fed’s determination that Wells has put its house in order.

The Fed faulted Wells’ board of directors for failing to prevent one of the largest consumer finance scandals in recent memory. Between 2011 and 2015, employees of the bank, struggling to earn steep incentives and to meet unrealistic sales targets, opened more than 2 million unauthorized accounts for unwitting individual clients.

More recently, the bank acknowledged that its auto lending division had forced hundreds of thousands of customers to buy car insurance that they didn’t need.

“It is incumbent upon the board of directors…to oversee an adequate risk management framework for the entire firm,” Michael Gibson, the Fed’s regulatory chief wrote, in a letter to the Wells Fargo board. “As events of the past few years have confirmed, Wells Fargo’s board’s performance of [its] oversight role did not meet our supervisory expectations.”

In the bank’s 2016 annual report—its most recent—Wells Fargo reported $507 billion in outstanding U.S. commercial and industrial real estate loans, including real estate mortgages and real estate construction and lease financing. The bank also won master servicer agreements on more than 60 percent of new commercial mortgage backed securities deals that year.

In addition to the growth prohibition, the Fed’s order demands that the bank submit plans to improve board oversight and regulatory compliance within 60 days, and to undergo a review of its progress by the end of September, 2018.

In a statement, the bank’s CEO, Timothy Sloan, pledged that Wells Fargo will respond proactively to the penalties.

“We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns,” Sloan said. “It is important to note that the consent order is [related]…to prior issues where we have already made significant progress.”

By market close on Monday, Wells’ shares had fallen more than 8.5 percent below their closing price on Friday.

In a conference call with investors that day, the bank said that by curtailing deposits from financial institutions and commercial clients, Wells would still have the bandwidth to write new commercial real estate loans.

“We’re continuing to serve customers, make loans—including commercial real estate loans—and take deposits and will meet the requirements of” the Fed’s order, a Wells Fargo spokeswoman wrote in an email.

Christopher Whalen, the banker and consultant behind Whalen Global Advisors, opined that the Fed deserves some blame itself for fostering the environment that allowed Wells’ scandals to metastasize.

“The Fed has created this problem by letting these banks get so big,” Whalen said, citing the Fed’s giving its blessing to 2008 marriage of Wells Fargo and Wachovia. “It’s all because the Fed is paranoid about the treasury market. If they let primary dealers go down, there would be no one left to sell Uncle Sam’s debt.”

On the other hand, according to the analyst, the order could be a blessing in disguise for Sloan if he uses the growth limit as an excuse to cut bank on less profitable segments.

“Wells is gigantic,” Whalen said. “Telling them they can’t get any bigger, you’re doing them a favor.”

A representative from the Federal Reserve did not immediately respond to a request for comment.

Source: commercial

Profs Wonder How to Grade Fed Nominee Powell as a Student of Monetary History

Ever since then-presidential candidate Donald Trump accused the Federal Reserve Bank and its chair, Janet Yellen, of bowing to political pressure to keep interest rates low in 2016, Wall Street forecasters have faced a whirl of uncertainty.

Yellen, who has presided over a gradual return to monetary normalcy in the wake of the Great Recession, will reach the end of her term in January, four years after former President Barack Obama appointed her.

Her fate was fodder for anxious speculation. Would Trump renominate her? Whom might he choose to succeed her? Would melodramatic midnight tweets from the East Wing roil financial markets in advance of the decision?

In light of that uncertainty, monetary policy experts were relieved by the president’s nomination of Jerome Powell this month, whom Obama nominated to the bank’s board of governors in 2011. A lawyer who has worked at investment banks and the Treasury Department, Powell would be the first non-economist to lead the Fed since G. William Miller, an appointee of Jimmy Carter who performed so poorly that he was replaced within two years on the job.

Even so, Fed-watchers are cautiously optimistic.

“I’m as shocked as anyone at the level of decorum [Trump] displayed [in choosing a nominee],” said Kenneth Kuttner, the chair of the economics department at Williams College and an expert in monetary policy. “He didn’t do these goofy things of kind of teasing people [before revealing his nomination].”

“I have to believe that [White House Economics Council Chair Gary] Cohn and [Treasury Secretary Steven] Mnuchin talked some sense into him,” Kuttner added. “‘Donald: You don’t want to mess with this stuff!’ ”

In his public comments since joining the bank, Powell has presented himself as an advocate for continuity. In a speech in June to the Economic Club of New York, Powell spoke of his commitment to gradually unwinding the Fed’s post-crisis policy response.

“The Fed has been patient in raising rates, and that patience has paid dividends,” he said at the time. “If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates.”

That vision of policy stability appeals to Kuttner. “I haven’t read anything in his speeches that would indicate he was anything less than a straight shooter,” the professor said.

But experts are more concerned with how little they know about Powell’s view of the appropriate role of monetary policy during an economic meltdown.

“If there’s another crisis, I worry he may not be as capable of handling unfamiliar situations,” said Scott Sumner, the director of the monetary policy program at George Mason University’s Mercatus Center and the author of an economic study of the Great Depression. “I’m not saying that because he’s a non-economist—economists screw up all the time. But economists have a perspective on monetary policy that is overlooked by non-economists.”

A More Proactive Central Bank
Lessons from the Great Recession nine years ago illustrate how monetary expertise can be crucial to righting a troubled economy, Sumner said. Ben Bernanke, Yellen’s predecessor, was perhaps uniquely well suited to marshal U.S. monetary policy during that crisis, two years after President George W. Bush nominated him to the post in 2005. As a professor at Princeton University, Bernanke had grown to prominence among economists as a scholar of the Great Depression and Japan’s financial crisis in the early 1990s.

In his work on Japan in particular, Bernanke provided a clear guide to his thinking as to how central banks should act during financial crises, advocating for aggressive and unambiguous steps to counter credit freezes tied to declines in growth. A more traditional view of monetary policy postulates that once baseline interest rates are near zero, it could be risky or even impossible for a central bank to encourage substantive economic expansion—as opposed to just inflation.

Scholars in Bernanke’s camp took a different view, suggesting that through other avenues—like quantitative easing or ironclad commitments to inflation targets—the Bank of Japan could have done more to push the economy back toward its growth trend.

“Bernanke was very radical in what he encouraged the Bank of Japan to do,” Kuttner said. “He proposed targeting bond pricing, setting a numerical target for the 10-year [government bond.]”

Such a target would represent the bank’s commitment, in essence, to creating whatever amount of currency was required to bring down market interest rates. Even if material economic growth did not follow immediately, some measure of inflation surely would—expanding if nothing else the nominal tally of economic activity.

Nominal gross domestic product accounting is the crucial variable that central bankers ought to study to shepherd the economy through recessions, Sumner believes. In his opinion, Bernanke’s ideas about Japan, and his moves as Fed chairman to purchase troubled mortgage bonds onto the Fed’s balance sheet, represented an important mainstream acknowledgement that central banks’ role can extend beyond its traditional interest-rate lever.

“I think if you look at his academic writing, [Bernanke] was very conscious of the need for the Fed to boost aggregate demand when we hit the lower bound” of traditional interest-rate policy, Sumner said. When the benchmark federal-funds rate reached zero, Sumner said, “a non-economist would become complacent and just think, ‘We’ve done fine.’ “

Bernanke, on the other hand, was attuned to the Fed’s power—and responsibility—to act more assertively, Sumner said. In fact, he suspects, Bernanke was probably eager to push monetary policy even further than institutional constraints and Congressional regulators allowed him to go.

“Bernanke would have liked to do more,” Sumner said. For example, unlike the European Central Bank, “the Fed never adopted a negative interest rate policy,” the professor noted, adding that despite his personal distaste for negative interest rates, the policy may have been helpful in boosting nominal GDP at the time. “I give [Bernanke] credit for nudging the Fed to be more aggressive.”

Mark Grinis, head of EY’s global real estate group, remembers being equally impressed.

“In my years of experience, I had never seen the power of the Fed wielded by aggressively entering the open market,” Grinis said. “We had never seen [the central bank] act in any way like that before.”

%name Profs Wonder How to Grade Fed Nominee Powell as a Student of Monetary History
Ben Bernanke and Janet Yellen chat at a Capitol Hill ceremony earlier this month. Photo: Alex Wong/Getty Images

It’s a line of thought that has remained appealing to Bernanke even today, three years after his departure from the central bank. In an article posted last month on his blog at the Brookings Institution, where he is now a distinguished fellow, Bernanke outlined his support for central banks targeting steadily rising prices during a recessed economy, representing a commitment to energetic monetary policy in downturns.

Yellen, who had a front-row seat to the Fed’s financial-crisis activity as the president of the San Francisco Federal Reserve Bank, has for her part sometimes delivered a more traditional view—blaming the Great Recession, in a 2010 speech, on “sophisticated financial engineering” and “lax loan standards”—a departure from Sumner, who argues that tight monetary policy was the main culprit.

But in office as chair, Yellen pursued a policy contiguous with Bernanke’s proactive stance. For example, she has used forward-looking statements and scheduled benchmarks to spur markets toward the Fed’s goals.

A Known Unknown
That narrative provides two sharp contrasts to the prospects of a Powell chairmanship. For one, Bernanke’s extensive scholarly output from his pre-Fed career in academia—dozens of papers, a macroeconomics textbook and a book of essays on U.S. monetary history—provided an effective roadmap to his thinking, indicating his penchant for a proactive monetary response. In Powell, economists confront a far less documented thinker.

“I don’t really know the guy,” Kuttner said. “All I know is what I’ve read in [Powell’s] statements at the Federal Open Market Committee.”

A more concrete concern, however, is Sumner’s suspicion that Powell may manage monetary policy less adeptly than his predecessors—neglecting to act forcefully enough in a crisis and perhaps overreacting to market-driven price changes.

Sumner noted that Miller, the failed Carter-era Fed chair, “didn’t see the need to tighten monetary policy while inflation was accelerating toward double digits,” an example that Sumner said illustrates a non-economist’s conflation of the federal funds rate with a more holistic perspective on the condition of monetary policy.

On the other hand, Sumner said, it would be a mistake to overuse monetary policy to knock down asset prices that look inflated, as Powell has suggested he would be tempted to do. During the Depression, the professor explained, the Federal Reserve used tight monetary policy to deflate what its leaders saw as a stock-market bubble. In the process, though, “they also punished Main Street quite severely,” Sumner said. “Monetary policy is a blunt instrument.”

It’s also an instrument that’s among the most important in determining the real estate business cycle.

“All you have to do is look at how [real estate investment trusts] reprice as soon as there is movement in one direction or another on policy statements [from the Fed],” Grinis said. “We are a highly levered industry. The cost of that financing is a key component.”

Wall Street and Main Street both still have some time to process the news: If confirmed, Powell, a 64-year-old Washington, D.C., native, wouldn’t move into the chair’s office until January. In the meantime, Fed-watchers appear content with a choice that could have been far more startling.

“In the short run,” Sumner said, “he’ll probably do fine.”


Source: commercial

After Shock: How Brexit and Trump Have Impacted Commercial Real Estate

It’s been just over a year since a slight majority of British voters shocked the world and chose to leave the European Union and less than eight months since Donald Trump spoke in front of his, uh, historic crowd on the National Mall at his inauguration on Jan. 20. The two populist movements sent shockwaves through financial markets, and the commercial real estate arena was astonished and dumbfounded. 

Now, commercial real estate industry leaders, who’ve been operating within a flatlined system and are eager for a pulse to return to the market, probably wish they had a reason to look to Five Man Electrical Band’s 1971 track “Signs” and collectively sing, “Sign, sign, everywhere a sign, blocking out the scenery, breaking my mind. Do this, don’t do that, can’t you read the sign?”

As of now, no, they can’t—and they’ll have to save any karaoke routines for the shower. Last year, shortly after the Brexit vote and before the U.S. election, most real estate professionals Commercial Observer spoke to reported that they were in a holding pattern. The beginning of Trump’s tenure saw some measured optimism with some big leases at the beginning of the year and chatter surrounding a massive stimulus in the form of a nationwide infrastructure project, but still, the real estate community has remained in a holding pattern. Immediate and concrete signs that the uncertainty and instability sparked by the two movements is beginning to wane seems to be nothing but veiled hope—for now.

“It’s just been boring. Nothing’s really happened, and nothing really seems like it’s going to happen,” Jay Rollins, the chief executive officer and managing principal of JCR Capital, told Commercial Observer. “People are waiting for a shoe to drop because they’ve been trained. It’s like, O.K., a real estate cycle is 10 years. Something bad should happen. What is it? I don’t know. It’s out there somewhere like a boogeyman in a closet, but we don’t know. Everybody is nervous over what they don’t know. Very few people are saying they’re out and they’re done, but it’s hard to get enough conviction to [take risks]. There are no anomalies in the system that you can say will cause a screw-up.”

Not everybody shares this view: Ken McCarthy, principal economist at real estate services firm Cushman & Wakefield, doesn’t see the market as so “boring.” “From a New York office perspective, I think it’s been a pretty exciting year. If you look at the volume of new leasing, it’s very strong. If we keep this pace up through the first seven months, it’ll be one of the top two or three strongest years in the past 15 years, so there’s a pretty healthy amount of new leasing going on.” 

And he’s right. As millennials flock to urban centers in gateway cities and financial services firms expand their information technology and tech development wings, demand for jobs in financial technology could lead to sustained leasing and construction in new development. That, coupled with an expansion in health care services to serve an aging Baby Boomer population, McCarthy said, could lead to a leasing uptick.

“[A possible surge in the market] will come from sustained job growth,” McCarthy said. “As long as we sustain it, people will get comfortable with it. But, we have to keep an eye on what’s going on in Washington, D.C. The policies implemented by this administration will have an impact. 

“Throughout this year, there’s certainly been a significant amount of optimism, particularly in equity markets, on the expectations of deregulation, changes in tax laws, spending on infrastructure,” he added. “Those things have led to investors picking up their investments, seeing the equity markets rise. If those policies are delayed or don’t happen, then I think there may be some reassessment by investors, and I think that might affect the market as well. But, I think in terms of leasing fundamentals right now, they’re healthy, and they’re probably going to remain healthy, but Washington could play a role in determining how healthy they are.”

A lot of air left the optimists’ sails when one of the signature promises of the Trump administration—a lavish trillion-dollar infrastructure package—all but disappeared. A broad rollout of the plan in the spring stalled over the summer, and the expected $1 trillion of federal investment was slimmed down to $200 billion with another $800 billion in private and local state investment. The administration hasn’t officially given up on the plan yet (last week the administration had briefings with state and local officials about the plan, according to The Hill), but it has been sidelined by legislative skirmishes over health care, taxes, Hurricane Harvey and the myriad other problems that have dogged the White House.

In New York, year-on-year property sales plummeted 58 percent—to $4.3 billion—in the first quarter, marking the lowest quarterly sales volume in six years, according to data from Cushman & Wakefield. Real Capital Analytics Inc. found that, overall, nationwide sales fell 18 percent. 

“What’s driving the New York market [is] the safety,” said Herb Hirsch, who leads the Commercial Division of Berkshire Hathaway Homeservices. “I think if we can get this political situation under wraps and get the economy really moving with the tax benefits that everyone wants, I think we’ll be fine. Question is, Will that happen? That is a subject you could spend all day discussing.”

Uncertainty surrounding whether Trump’s industry-friendly policies will ever come to fruition, as well as how tax cuts and an increase in spending could raise inflation and spark an interest rate hike, has tamped down overly aggressive deals. 

“I think cash flow is king right now,” said New York-based Silverback Development Founder Josh Schuster. “People just want to focus on safe opportunities that kick off the yield, that’s protected, so that they can withstand and weather any storm that’s about to approach, if any. So, each investment is being played like a hedge right now. You see fewer opportunistic deals; people are looking for more singles and doubles and less for home runs and grand slams.”

Many, including McCarthy and Rollins, agree that Brexit’s effect on the United States market, specifically New York City, was minimal, while others believe Trump’s Washington tactics and rhetoric, whether intended or improvised, may bring a positive, but bittersweet, influence on the market. 

Schuster, for one, sees Trump’s boisterousness as a positive. “I like the boasting out of Trump. He’s adamant in saying, ‘I’m going to save jobs. I’m going to bring them back. I’m going to boost the economy. I’m going to bombard [Federal Reserve Chairman] Janet Yellen with a bunch of tweets until I get my message across.’ I’m not saying that I approve of it, but…looking at it as an outsider, I think, what he says and what he does is going to have more of a positive influence than a negative one.”

Rather than pass any blame on Brexit and Trump’s rise, specifically, industry leaders are focused on indicators such as jobs reports, the growth of debt funds, the pressure to raise the U.S. debt ceiling and the roles of the Federal Reserve and Yellen as the most plausible tinder that could light a fire under the market and spur more action.

In a speech on Aug. 25, during the Fed’s annual summit in Jackson Hole, Wyo., Yellen, whose term expires in February, stressed the importance of regulation, saying that the crisis “demanded action” from the institution and that its reforms had made the system “safer.” Her words go directly against Trump’s push to rollback post-crisis regulations.

“Everybody’s looking at their watches and saying, ‘O.K., it’s been 10 years: It’s time for a slight recession or depression,’ but [Yellen’s] outlook and the Fed’s outlook now is, no, that’s not necessarily the case,” Schuster explained. “Time is not what dictates a cyclical change. Policies dictate change, so the fallout of Brexit is what we need to monitor; increase in interest rates is what we need to monitor, and the U.S. debt ceiling is what we need to monitor… But right now, we need to focus on the macro policies because that’s what inspires fear, and fear is what prevents growth.”

In the United Kingdom, the initial shock of its choice to become the first country to remove itself from the EU created a significant pause as former Prime Minister David Cameron resigned almost immediately and was replaced by Theresa May, the British pound plummeted to a 31-year low—while the U.S. dollar surged—and the stock market fell sharply. In the weeks and months following the referendum, some of the country’s largest asset management firms, including Henderson Global Investors, Columbia Threadneedle Investments and Canada Life, began freezing its commercial property funds. 

On March 29, May triggered Article 50 of the Treaty of Lisbon, which sets out the procedure for a member state to leave the EU. It mandates that the member state first notify the EU of its withdrawal, and it requires the EU to negotiate a withdrawal agreement with that state.

“Basically every corporate boardroom is laying out Option A, Option B and Option C, depending on how the negotiations [surrounding Article 50] go,” McCarthy told CO soon after Brexit. “The EU has cruised through this with no signs of anything negative in terms of economic performance. But there is still this uncertainty around whether this could lead to other issues and more populist uprisings in other countries, leading to more pressure in the EU. So most corporations are setting up a number of different scenarios given the potential different outcomes and developing a strategy for each one.”

Right now, investors and industry leaders are focusing on the progression of Brexit negotiations as a gauge for instability. 

Some, though, aren’t frightened and would rather not lie in wait. Brookfield Asset Management, a New York-based alternative lender with a strong global footprint, continues to boast strong business in London, as evidenced by its second quarter earnings report. 

“The United Kingdom has continued to capture the news of the day with its Brexit negotiations,” the report reads. “Despite the headlines, virtually all of our businesses are doing well. We have a number of office buildings under construction in the city of London and leasing continues to be strong. Since Brexit, we signed a major law firm to over 200,000 square feet of space at our 100 Bishopsgate project, and we are progressing construction of a number of major residential rental projects and other office projects, which are substantially fully leased.

“The full impact of Brexit on the U.K. is still unknown, but our view continues to be that the effect will be moderate and that London will remain one of the global centers of commerce for a long while. We see no other competitive center in Europe—and globally, few cities rival it as a welcoming market for global business.”

Commercial real estate investment volumes in the U.K. rose 13 percent on the year in the second quarter, and through the first half of this year, cross border investment climbed 24 percent compared to the first half of 2016, according to data provided by brokerage Savills Studley. 

“Currency balancing out and being consistent has provided a better entry point for foreign investors to move into the U.K.,” said Savills Studley Chief Economist Heidi Learner.

“We wouldn’t expect, at this juncture, a dramatic move in the currency, or at least it won’t be as dramatic as last June,” she added. “Markets have considered the probability that Brexit negotiations will not favor the U.K., but that hasn’t dissuaded investors putting their capital to work. The activity partially reflects that.”

Last month, Reuters reported that Chinese investment in U.K. commercial property, mostly channeled through Hong Kong, had reached record highs as the fall in the pound opened a door to more foreign investment. 

Chinese investors poured in 3.96 billion pounds, or roughly $5.1 billion, on London commercial property in the first six months of the year, outpacing the 2.69 billion pounds ($3.49 billion) invested throughout all of 2016, according to data from CBRE real estate group. 

“Asia, particularly China, had many years of strong economic growth, and they’ve built up a lot of reserves that needed to be deployed, and they began to deploy it around the world,” McCarthy said. “Investors are seeking to diversify their assets, and real estate is one they were underinvested in, so we started to see an increase in deployment of assets into real estate in the United States and London. That’s the first thing: There’s more cash available to invest, and New York and London have always been the premier locations globally. It’s not surprising that you’d see a significant increase in investment in these markets.”

In July, Business Insider reported that a fund, called First Property, backed by eight institutional investors had raised 182 million pounds with a goal to go after post-Brexit office properties and business parks around the country. First Property CEO Ben Habib told BI, “The U.K.’s decision to leave the EU has created opportunities on which we, as a niche fund manager, are well placed to capitalize.”

The uncertainty may not scare some foreign and domestic players, who are at home, navigating London’s commercial real estate market, but the instability has many racing stateside, searching for opportunity, including at Schuster’s Silverback Development. 

“Weekly, [at Silverback] we’re meeting new faces and learning new names of people from groups that want to move capital from, say, a London-based housing developers to New York-based ones,” Schuster said. “So, we’re luring a new capital that wasn’t necessarily there a year ago. I think the next two months are going to be critical in seeing what happens because we’re going to see both the U.S. debt ceiling issue unfold and the rate hike maybe by the end of October.” 

It’s abundantly clear that this fall is going to be critical for policymakers as they navigate through the politics jungle. Market players who are watching from a distance can only sit back, hold fast and wait for a clear sign to fully re-engage the market.


Source: commercial