The stock market reaction certainly implies that Brexit has negative implications for the world economy, including the US. At Friday’s close, the DJIA was down by 3.39%.
(Edit: DJIA was down by 4.8% as of 12pm EST on June 27, 2016)
But is Brexit bad for US commercial real estate? We think not. Clearly there are risks to the global economy, but on a relative basis, this solidifies the US’s dominance as a financial center and a safe haven for foreign capital. Provided, of course, that foreign investors don’t find our presidential election even scarier than Brexit.
Here are the five most important implications that we see for US commercial real estate:
1. Lower interest rates mean higher returns
The 10 Year Treasury yield was down 18 bp as of early Friday, to 1.57%. A stronger US dollar means continued downward pressure on interest rates. Low interest rates mean more net cash flow and higher values for real estate investors.
2. Renewed influx of foreign capital seeking a safe haven
The US and the UK property markets have been the two leading safe havens for foreign investors. Now, uncertainty over London’s future as a global financial center will likely redirect more of this capital to the US. While some capital may be redirected from London to European financial centers such as Paris and Frankfurt, it is unclear whether these cities are net winners or net losers due to Brexit. Concerns over the future of the EU and the European economy will lead many to conclude that the US is a safer bet.
Foreign investment in US real estate jumped to a record level of $72 billion in 2015. So far in 2016, foreign inflows have returned to a more normalized level of around $30 billion per year. A renewed “Brexit effect” surge in foreign investment could produce another jump in real estate values.
3. Heightened political risk in US
Will the Brexit vote encourage US voters who hold similar isolationist and anti-immigration views, or will the economic penalty imposed on the Brits cause these voters to reconsider the impact of their policies? This is a wild card that won’t be resolved until November. If global investors perceive US policy to be unpredictable and anti-trade, a similar penalty could be imposed on the US and investors may have trouble finding a truly “safe” haven.
4. Declining overseas travel could hurt hotels
The strengthening of the dollar relative to Sterling and the Euro makes travel to the US more expensive. This is likely to hurt occupancy at US hotels, particularly those in gateway cities that are heavily dependent on foreign travel.
5. Continued volatility of REITs relative to direct real estate
At Friday’s market close, the NAREIT index was down even though the implications for US real estate are generally positive. This highlights the disconnect between REIT stock prices and underlying real estate values. In periods of stock market volatility, REITs, like all stocks, get caught in the emotional gyrations of the market. Their price is driven more by global capital flows and investor sentiment than by fundamentals.