Now that Donald Trump baffled most of the pundits to secure the U.S. presidency, a host of people from different industries are beginning to study how the Trump administration’s policies will affect them and the overall U.S. economy over the next four years and beyond.
Those in the apartment industry are trying to get a beat on how the economy might look, with its effects on the U.S. job market and the atmosphere for investments. Jobs are sure to be a focal point, as one major factor in Trump’s victory was that his message about job creation resonated with blue-collar workers in the Rust Belt who have voted Democratic in the past.
Trump’s election will likely mean a return to the emphasis on supply-side economics popularized during the Reagan administration. The Gross Domestic Product is the sum of consumption, investment, government expenditures and net exports, and the new administration’s focus will likely be on investments and net exports (meaning trade deals).
On the investment front:
- Comprehensive tax reform benefiting investors is likely. If those beneficiaries invest that money to the economy, GDP and job growth may pick up. And jobs are the major driver of apartment demand.
- The financial industry has been overloaded with regulatory oversight since the Dodd-Frank Act was enacted. Expect this to loosen and affect Commercial Mortgage-Backed Securities (CMBS) and the single-family home-buying market in general. Home buying should pick up, albeit slowly, with very little impact to multifamily market.
- Because Trump and the Republican Congress will likely make major changes to the Affordable Care Act (ACA), the health-care burden borne by business could be reduced. If the 25 million people with ACA can be smoothly transitioned to market-based insurance, both business and consumers could save money.
- Investment in infrastructure could increase productivity levels, which could boost national wealth and add jobs.
- The re-patriotization of off-shore money by U.S. companies would bring more dollars home and increase GDP and job growth.
- Monetary policy will be more data driven, and we expect the pace of Federal Funds Rate increases to ramp up starting mid-next year.
- Despite the increase, the 10-year T-Bill rate should rise gradually to about the 3% range by the end of 2018. Even with this increase, apartment cap rates are still expected to remain low because of the high investor demand for apartment properties.
On other issues, Trump spoke strongly against current U.S. trade policies while he was on the campaign trail. But most of the time, reality sets in once the president-elect actually sits in the Oval Office.
So, don’t necessarily expect the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) to be abandoned. Do expect heavily negotiated terms with our partners, since positive net exports can help GDP calculation. Trade policies should be based on comparative advantage rather than managed and regulated free or fair trade.
Trump’s idea to create child-care accounts free from taxes and to allow families to deduct more child-care expenses from their taxes makes fiscal sense. That will free up money for consumption, which boosts GDP and job growth.
And, stricter immigration laws are imminent. In the short-run, displacement of population could reduce national consumption side of the GDP equation. For the apartment market, more immigrant renters may double up, reducing occupancy.
With all this in place, we expect average GDP growth of 2.5% from 2017-2020, barring an unexpected shock to the economy. About 10.3 million jobs could be created before the next presidential election, with annual average growth of 1.7% — exactly the rate of October 2016.
That’s our view. If Trump’s projections that his policies could increase GDP to 3.5%-4%, more jobs would be created, benefiting the apartment market.
One thing to consider, though, is that the economic cycle kicks in no matter who is president. The current economic expansion has lasted more than seven years, and the longest expansion period on record was 10 years. That means the business cycle is pointing toward a downturn in the not-too-distant future.
Also, a recession has always occurred within 12 to 36 months (an average of 24 months) after the unemployment rate falls below the natural rate of 5% -- it was 4.9% in October. So, it is likely a recession – albeit mild – will occur by the end of 2018. But we expect GDP and job growth to continue rising for the next four years because of the slow to moderate growth during the current recovery.
But if economy-stimulating Trump policies as mentioned above are enacted, a recession could be averted.
And therefore, we anticipate the U.S. apartment market to perform well during Trump’s first term, with annual average occupancy of close to 95% and rent growth exceeding 3.0% from 2017-2020. New supply is expected to average about 330,000 units per year during the same time period.
But higher GDP and job growth, as Trump predicts will happen, could mean rent growth and occupancy increase by an extra 50-100 basis points.
In other words, we expect the apartment market – and the economy – to be generally positive during the next four years, even though unexpected outside shocks could muddle things up.