Six Months In, Has There Been a Trump Impact?
If you do not believe political sentiment impacts real estate decisions, you should talk to Camden Chairman and CEO Ric Campo.
In late 2015, Campo, who piloted Camden though multiple real estate and political cycles since founding the company in 1982, decided to sell 10 percent of his portfolio. For a $10 billion REIT, that’s no small task. By the end of the year, he disposed of $1.2 billion of assets.
“I did that because I felt uncertain about the economy, I felt uncertain about the election, and I felt that the market was toppy from the assets we were selling, which were older assets—the value-add stuff,” Campo says. “That was my view in 2016 and I acted on it aggressively.”
Now, six months into the Trump Administration, Campo admits the he is more optimistic than he was in late 2015. As Camden sold assets, Campo also wound down the REIT’s development pipeline in 2016. He is thinking about ramping things back up and breaking ground on new projects.
“If Trump implements the policies he was talking about [during the campaign], the economy could do well over the next three to four years,” he says. “The fundamental policies, if they are enacted, are good for our business and business in general.”
While Campo remains optimistic, he, like many apartment executives, seem to be growing frustrated with the inability of the Republican Congress and the Trump administration to pass meaningful legislation.
“On the one hand, we have certainty about who is in there,” Campo says. “On the other hand, you don’t have certainty about the administration’s ability to get anything done.”
Stuck in Neutral
After the election, the business community welcomed the new Trump administration.
“The Trump administration took office with a surprising amount of economic and financial market goodwill,” says Greg Mutz, Chairman and CEO of AMLI Residential. “Many pundits called the surge in the stock market and asset valuation upticks post-election a result of the ‘Trump effect.’ Markets made the bet that the combination of infrastructure spending, regulatory reform including Dodd-Frank tweaks, tax reform and fixing Obamacare would spur economic prosperity, encourage investment, improve job opportunities and increase wage growth.”
Business leaders hoped the Trump administration and the Republican Congress could quickly pass these big-ticket items.
“I think what Trump wants to do should be helpful to real estate,” says David Schwartz, CEO and Chairman at Waterton. “If he gets some regulatory reform done, that would be good for our industry.”
But so far nothing has happened. “There hasn’t been any real policy that has come to fruition,” Schwartz says. “Business and investors are being a little cautious because of uncertainty with respect to tax reform. All of the troubles in his administration just creates more uncertainty with respect to tax reform.”
Of course, the burden to pass real legislation first falls on Congress. “I have conversations with chairmen of committees,” Campo says. “What they tell me is that they are doing their job and their issue is getting their constituents on the same page as the President. That’s the real issue.”
Right now, Trump is not able to pull in Republicans and maybe even some vulnerable Democrats along with him.
“With his low approval ratings and this [Russia] quagmire, he can’t be a force on the political scene,” Campo says. “He cannot punish people. Now he might be a liability. That’s probably the biggest weakness that he has is his inability to get to the bully pulpit and tell America that they need to follow what he is doing.”
But some moves, including the immigration bans could affect the industry down the road. “The immigration issues have not affected us,” Campo says. “Immigration is important long term when you think about jobs.”
Schwartz points to hawkish Federal Reserve selections, such as Randal Quarles, a former Treasury official under President George W. Bush, as the Fed’s vice-chairman of supervision, as something the apartment industry needs to be watching.
“You may have more hawkish views on interest rates and that may be not great for industry,” Schwartz says. “Of course, higher rates could also be good for the apartment industry because fewer people are buying homes.”
Business as Usual
Despite the uncertainty surrounding the Trump administration, the apartment market continues to flourish. In the second quarter, occupancy hit 95 percent and new-resident leases rose 1.8 percent, according to RealPage.
“The apartment industry continues to hum along in an acceptable way,” Mutz says. “Rent increases are moderating, new supply is having an impact, labor shortages are causing hard costs to increase significantly, regulatory and entitlement burdens are increasing and, generally, development margins are coming back to earth. Job creation and household formation are continuing at a reasonably strong pace so that demand is roughly staying equal with supply.”
On the transaction side, the situation has become rockier since the election. Immediately following the election, interest rates rose. “That caused the market to freak out so deals got re-traded,” Schwartz says. “Things normalized six months later.”
The lingering effects of these trades muted apartment transaction volume early in 2016. But prices are up and cap rates remain low, according to Jim Costello, Senior Vice President at Real Capital Analytics.
“I don’t see the impact of Trump on the apartment sector,” Costello says. “Really, I think the jury is still out on this topic. The issue is that they have not done anything yet on the issues that would matter such as tax policy and the status of the GSEs.”
Though anemic, this economic recovery hit its eight-year mark in June, making it the third longest expansion ever. Campo thinks business-friendly policies could extend it further. But if those policies don’t come to fruition, that failure could potentially lead to a recession.
“Is all of the noise you hear [about Russia] going to cause a situation where they are unable to get anything done,” Campo says. “If you don’t have tax reform and any regulatory relief, what do you have? Recessions don’t happen because of time, they happen because of events. If they cannot get things done, that could be the thing that causes business to be less buoyant.”