NEW YORK CITY—The priorities of the incoming Trump administration could make a substantial impact on commercial real estate on a variety of fronts, as the industry is affected long-term by everything from the tax code to the healthcare climate, all of which are on the agenda for the next president. But what about the very foundation of the real estate itself: development and construction? GlobeSt.com sat down with Julian Anderson, North America president of construction advisory firm Rider Levett Bucknall, for his take on the positive and potentially negative implications of president-elect Donald Trump's plans for is first 100 days in office, as spelled out in his Contract with the American Voter.
GlobeSt.com: That the election is going to have implications—is that a foregone conclusion at this point, simply on account of the change in administration?
Julian Anderson: When I think about what's likely to happen, the only thing I can rely on is the Contract with the American Voter paper, which sets out the new administration's goals within the first 100 days and beyond. Campaign rhetoric aside, the things that are in this Contract with the American Voter are the things they're going to implement. That gives us a clue to the short term. It does not help us a great deal with the longer term.
In the short term, there are some big moves: not only reducing the tax rates, but also simplifying the tax bands. In theory, it should help the economy by releasing more money for the private sector to spend and should generate economic activity. In the longer term, there's a risk that the debt will drive up interest rates because of increasing government debt, which in the long run would be a damper on economic activity unless you happen to believe that Arthur Laffer's J-curve is going to work in this case. It has worked occasionally around the world, but has also not worked.
Everybody has talked about the infrastructure spending; how that gets started, I'm not sure. There has been talk of using some of the tax that they get from repatriated profits from overseas. They seem to be narrowing down the use of public-private partnerships—it was narrowed down very much to transport and then broadened it out to infrastructure again. That's good, but in the long term people need to understand that it's not free. There's a toll or some other sort of revenue generator that people are going to have to deal with.
A couple of things are hidden as far as real estate and construction are concerned. One that I pick up on is the cutting off of federal funding to sanctuary cities. I don't know what has to happen for funding to be cut off, and I don't know what cutting off federal funding to sanctuary cities means in detail. But I can imagine that if you're in a city like San Francisco, you can expect federal funding to go away pretty quickly, and if you're interested in doing any multifamily development that involves HUD funds, your project just went away. It might also mean that you're not going to get your new roads, your new bridges, so while there's spending on infrastructure over here, it might be hurt somewhere else.
Second, I don't think people realize the potential double impact of the mass deportation of illegal/undocumented immigrants. That has two aspects to it. The first is that even in a country as big as the United States, if you get rid of two to three million people out of your economy, that's a lot of your economy going. More than that is the fact that in some construction trades, the Hispanic contribution to the workforce is 50% or higher, according to the Bureau of Labor Statistics. That's going to have an impact in some cities, when construction costs are already very high and rising much faster than the CPI inflation rate. In some cities, I think it will stall development.
GlobeSt.com: Because of the labor shortage?
Anderson: Not because of the labor shortage itself, but because the shortage of labor will cause prices to spike even higher. And there will be some projects where contractors will say, “We can't bid because we can't get people.” So it's a double whammy hidden in the detail of the Contract with the American Voter.
Now, the Contract with the American Voter is the new administration's view of what's going to happen. But there are members of the Republican Party, particularly in the House, that have different views about deficit spending. So I would guess they'll get their tax cuts through in some form; how they'll do everything else is a bit of a mystery to us.
GlobeSt.com: How, or if, in some cases, in terms of whether the provision of the Contract can be realized.
Anderson: Right. So there's some doubt around that. To summarize all that, short term should be good for the economy and real estate, medium term, doubtful; long term, quite doubtful.
GlobeSt.com: One scenario that's discussed quite frequently is a so-called trade war, especially with China. If that does come to pass, would it have an effect on construction costs?
Anderson: There are two potential trade wars. One is slapping tariffs on Chinese imports. That would have some effect, particularly in curtain walls—the glass facades for buildings. A lot of the facade work is sourced from China. What people seem to worry about most is structural steel, and in fact it's not a problem. Last year, the US imported something like 860 tons of structural steel. I don't think I've worked on a project that has that little steel in it for a long time. In this country, we get our steel for major construction items out of scrap, so it's just not an issue.
There will be some effect, though. The worst will be what it does to the value of the US dollar, because if the US does get into a significant trade war with China, the Chinese will absolutely retaliate. And they own a lot of our debt. If I was the Chinese government and wanted to teach America lesson, I think I would dump some debt to wake people up and say, “Now, come back and talk to us.” The other aspect that bothers me is that having a trade war with China, and not participating in the Trans-Pacific Partnership, would mean that China takes the lead on that, which will freeze us out in the long term. In a trade war, China would probably also stop their nationals from investing in the United States.
Also of serious concern is NAFTA. The US is not the world's biggest importer of cement; China is. But we do import a lot of cement, and a lot of it comes from Mexico. If you tear up NAFTA, all of a sudden you'll be paying more for the cement we have to get out of Mexico—and more for the lumber we get out of Canada.
GlobeSt.com: That the election is going to have implications—is that a foregone conclusion at this point, simply on account of the change in administration?
Julian Anderson: When I think about what's likely to happen, the only thing I can rely on is the Contract with the American Voter paper, which sets out the new administration's goals within the first 100 days and beyond. Campaign rhetoric aside, the things that are in this Contract with the American Voter are the things they're going to implement. That gives us a clue to the short term. It does not help us a great deal with the longer term.
In the short term, there are some big moves: not only reducing the tax rates, but also simplifying the tax bands. In theory, it should help the economy by releasing more money for the private sector to spend and should generate economic activity. In the longer term, there's a risk that the debt will drive up interest rates because of increasing government debt, which in the long run would be a damper on economic activity unless you happen to believe that Arthur Laffer's J-curve is going to work in this case. It has worked occasionally around the world, but has also not worked.
Everybody has talked about the infrastructure spending; how that gets started, I'm not sure. There has been talk of using some of the tax that they get from repatriated profits from overseas. They seem to be narrowing down the use of public-private partnerships—it was narrowed down very much to transport and then broadened it out to infrastructure again. That's good, but in the long term people need to understand that it's not free. There's a toll or some other sort of revenue generator that people are going to have to deal with.
A couple of things are hidden as far as real estate and construction are concerned. One that I pick up on is the cutting off of federal funding to sanctuary cities. I don't know what has to happen for funding to be cut off, and I don't know what cutting off federal funding to sanctuary cities means in detail. But I can imagine that if you're in a city like San Francisco, you can expect federal funding to go away pretty quickly, and if you're interested in doing any multifamily development that involves HUD funds, your project just went away. It might also mean that you're not going to get your new roads, your new bridges, so while there's spending on infrastructure over here, it might be hurt somewhere else.
Second, I don't think people realize the potential double impact of the mass deportation of illegal/undocumented immigrants. That has two aspects to it. The first is that even in a country as big as the United States, if you get rid of two to three million people out of your economy, that's a lot of your economy going. More than that is the fact that in some construction trades, the Hispanic contribution to the workforce is 50% or higher, according to the Bureau of Labor Statistics. That's going to have an impact in some cities, when construction costs are already very high and rising much faster than the CPI inflation rate. In some cities, I think it will stall development.
GlobeSt.com: Because of the labor shortage?
Anderson: Not because of the labor shortage itself, but because the shortage of labor will cause prices to spike even higher. And there will be some projects where contractors will say, “We can't bid because we can't get people.” So it's a double whammy hidden in the detail of the Contract with the American Voter.
Now, the Contract with the American Voter is the new administration's view of what's going to happen. But there are members of the Republican Party, particularly in the House, that have different views about deficit spending. So I would guess they'll get their tax cuts through in some form; how they'll do everything else is a bit of a mystery to us.
GlobeSt.com: How, or if, in some cases, in terms of whether the provision of the Contract can be realized.
Anderson: Right. So there's some doubt around that. To summarize all that, short term should be good for the economy and real estate, medium term, doubtful; long term, quite doubtful.
GlobeSt.com: One scenario that's discussed quite frequently is a so-called trade war, especially with China. If that does come to pass, would it have an effect on construction costs?
Anderson: There are two potential trade wars. One is slapping tariffs on Chinese imports. That would have some effect, particularly in curtain walls—the glass facades for buildings. A lot of the facade work is sourced from China. What people seem to worry about most is structural steel, and in fact it's not a problem. Last year, the US imported something like 860 tons of structural steel. I don't think I've worked on a project that has that little steel in it for a long time. In this country, we get our steel for major construction items out of scrap, so it's just not an issue.
There will be some effect, though. The worst will be what it does to the value of the US dollar, because if the US does get into a significant trade war with China, the Chinese will absolutely retaliate. And they own a lot of our debt. If I was the Chinese government and wanted to teach America lesson, I think I would dump some debt to wake people up and say, “Now, come back and talk to us.” The other aspect that bothers me is that having a trade war with China, and not participating in the Trans-Pacific Partnership, would mean that China takes the lead on that, which will freeze us out in the long term. In a trade war, China would probably also stop their nationals from investing in the United States.
Also of serious concern is NAFTA. The US is not the world's biggest importer of cement; China is. But we do import a lot of cement, and a lot of it comes from Mexico. If you tear up NAFTA, all of a sudden you'll be paying more for the cement we have to get out of Mexico—and more for the lumber we get out of Canada.
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