The political adventure in self-abuse that we call an election is now well behind us. I planned to write this commentary last November, hence the “Just” in the title. My inability to even assay an answer to that question which would pass my relatively low standards for perspicacity has stayed my pen these several months. But now, it’s time. I’m not going to get any smarter and Mr. Trump is in his sixth week (feels considerably longer, doesn’t it?). The executive orders are flying, the Elon Musk wrecking ball is spinning madly and we’ve been measuring drapes for our new Greenland residence. Certainly, there is more surficial change in the contours of our government in the past several weeks than we’ve seen in years.
The folks who self-identify as Republicans (in some case I can’t tell that by looking or listening) control the Senate with enough of a cushion that the leadership won’t have to worry so much about Alaska or Maine and it seems that it will continue to maintain a tiny majority in the largely ungovernable House (the House majority certainly didn’t do them much good in the past Congress except as an entertaining clown car for the rest of us to watch) but now with Mr. Trump at the helm, for good or ill, perhaps we’ll see more discipline here.
Do I need to radically change my posture as a commercial real estate lender right now? That’s the question, isn’t it? Is today vastly different than six months ago? Should I keep my powder dry? Dive in head first? Chase distressed debt? Return to the bridge market? Lower spreads to capture business? Get increasingly disciplined and damn all the mortgage bankers yapping? Can I continue to rely on the banks for back leverage? Are these halcyon times, or no? It seems that the macroeconomic legal and business environment in which we’ve conducted business for quite some time is convulsively changing, but is that true, and if so, how?
How does the Trump Traveling Circus (and the knock-on macro and geopolitical events resulting from Mr. Trump’s gyrations) affect short, medium and certainly the long term planning? Surficial volatility is manifest, but is the underlying reality of our business changing materially? None of these questions can, of course, be answered conclusively, but at least we need to try to hum the tune.
Does Trump have a mandate to drive radical change? The case could be made, and certainly has been made by His Orangeness, but it’s hardly compelling. The Democrats are whizzing around in small circles chasing their tail, wondering how they screwed up so badly (and in consequence, chasing a lot of phantoms). Because of this self-administered proctological examination the Democrats have embraced, they’re not likely to matter much for a while (and if they double down on their most left progressive positions, it might be a long while). While Trump didn’t win by a lot (and saying it over and over again doesn’t make it true), he did win and moreover, has a Svengali-like grip on a majority of the Republicans in the Senate and most of the House, where he has a cranky working majority. Consequently, it seems he’s going to get a lot of what he wants done, done.
Constitutional crisis hyperventilation aside (and I surely hope it’s hyperventilation), the judiciary seems an impuissant firewall to governance by executive order, perhaps slowing, but certainly not stopping, the Trump juggernaut.
Early in the election campaign, I wrote a commentary entitled How to Play An (Apparently) Manichean Election and mused there might not be that much difference between the business environment under the two potential administrations. Whoops, didn’t get that right, did I?
I’m not claiming any particular insight here (English quality understatement here) but I am compiling my list of the things in and about Mr. Trump’s new universe that seem to me to be impactful. Here’s my current list:
- We need to internalize that 3% is the new black. Interest rates will remain higher for longer. Trump’s fiscal policies make it almost certain that the curve will not shift down in any material way and it’s in fact easy to see it shifting up. The Prez wants lower rates, particularly those tied to the folks’ mortgages but while he may huff and puff (and God knows he certainly will), the White House has actually few levers to materially affect change. Could Mr. Trump actually get control of the Federal Reserve and go all Recep Erdogan on us? That seems a bridge too far. Frankly, as a monetarist, my take is that higher for longer would have been true even if Mr. Trump was governing more conventionally. Higher rates for longer are baked into the monetary aggregates already.
- The commercial real estate market is learning to live with this as its central reality. Capitulation to higher for longer has begun and will become more general. Consequently, more deals will get done. Some of the best loans lenders will make in the next cycle will be made in the next year or two. Yet, it won’t all be all rainbows and puppy dogs, given that a lot of new capital will be required to refinance the legacy book… Whether that capital is generated internally or from external sources (think pirate ship boarding parties) is irrelevant to the health of the market as a whole, albeit hugely relevant to the poor sods who acquired commercial real estate at the wrong price point over the past several years. So, while financing terrific new assets at market-clearing coupons and cap rates, also think distress. This market will need $200 billion plus of fresh capital to dig out of our legacy problem and much of that will have to be provided by new investors.
- Deregulation is everyone’s favorite nostrum (that is, everyone who doesn’t have MSNBC as the default setting on their tv remote or, given the demographic I’m thinking about here, other internet streaming device) to fix everything that’s been wrong and while it will be important, it won’t rewrite the core rules of the game, at least not anytime soon. Basel III is toast and that’s good. A non-SIFI common sense enforcement regime will be a boon for the banks as will the defenestration of the CSFB. Consolidation of the banking regulatory authorities would be terrific, although don’t hold your breath. The reduced regulatory footprint on the neck of the banks will mean it’s more likely the banks will return to the commercial real estate marketplace. Good for them, probably good for the users of capital, but not so good for non-bank lenders who have been enjoying a moment. On the other hand, the threat that was in the air about extending bank regulation to the non-bank set is probably gone. Net/net: deregulation will help, but it won’t be transformational.
- Geopolitical risk is certainly not diminished. Asymmetrically, it can only get worse. Not all dreadful geopolitical events, of course, will result in a concomitant negative impact on finance and the commercial real estate markets. Wars, for instance, have an uneven history as to their impact on commercial real estate markets. So, it’s a rather a hard variable to play (ok, nuclear annihilation would be pretty straightforward). What is clear is that, with heightened geopolitical risk, brief interregna of regular-way transaction activities are not unlikely (as only a lawyer would put it). Even if you’re embracing a halcyon days view of the markets, geopolitical risk is a reason to keep a little powder dry; don’t get too exposed to counterparty risk, in other words, hedge your joie de vivre a bit. Radical change is generally not a time to go all in.
- Global macroeconomic conditions are another crapshoot variable. Trouble outside our borders could reduce demand for US goods, reducing US GDP with the concomitant negative knock-on effect on the commercial real estate market. How to play recession in Europe? In China? I don’t know. While all of these could affect aggregate demand, on the other hand, it could encourage more inbound investment because we look like the best house on a bad street.
- Trump-time favorites: Taxation, waste, fraud and abuse, wokeness, migration and tariffs. Inflationary or recessionary? Pay your money and take your chances. For my money most of these things amount to a meh for our market in 2025. The consensus of the self-described clerisy of the economic world (but just a consensus) think recession is off the table for now, and I hope this time, they’re right. A tax relief bill sounds good, but it’s unlikely that much is going to get done in taxation except extending the existing 2017 tax regime, and that in itself won’t be expansionary. We’re not going to fix our growth problems by letting waiters and Uber drivers keep a little more of their hard-earned money. Also, we could see some nasty pay-fors in the mix. Business salt anybody? Carried interest? Who knows what our gloriously elected representatives will get up to when the horse trading begins.
- Tariffs, at least for the moment, seem more of a negotiating tool than a huge tax on US consumption, but, of course, we will have to see what emerges from the brain our stable genius…which, of course, can change from one day to the next and surprise him and much as us.
- Migration changes seem rather like yesterday’s news. Inbound is surely to drop to a trickle, but I struggle to see a scenario where Mr. Trump could materially repatriate something like 12+ million folks already here in the country. As long as that doesn’t happen, border policy is not likely to move the needle macroeconomically.
- Anti-woke? The issue certainly engages the chattering cast of the left and the right, but from a market perspective, it’s largely noise.
- Will the GSE’s be privatized? This could be a biggy. Does Mr. Trump’s Administration change the calculus? On its face, it seems to have done. Certainly, there’s more privatization chatter out there than we’ve heard over the past four years, but does it really make it more likely? Someone said the privatization question will turn on whether the Eye of Sauron turns to the GSEs, and that seems right and very hard to predict, as there’s a lot more consequential stuff on the Resolute Desk than this. However, it could happen. But if it happens, there’s a real questions of what “it” is. Does the government just set the guarantee fee at a level that will allow business as usual to continue? Will the G fee be pushed down to dial up the value of the franchises to create a bigger one time bonanza for the Treasury? Perhaps it gets pushed up to reflect the “real” value of the government guarantee (wildly unlikely). Might the twins be more radically restructured with lending limited to the stuff that Ginnie Mae does (or is supposed to do) today? Could the GSE’s be returned to their original role as bond buyers in the commercial real estate marketplace (and the residential marketplace for that matter)? Even more wildly unlikely. Any of these events would diminish the twins footprint and could be a bonanza for the conventional market, but don’t hold your breath. Is it possible that the agencies pull back in the lea of a potential privatization or amidst privatization talk? Keep their heads down and avoid the Sauron-like stare? That’s possible, but the best case is to assume business as usual.
- How about the GSA footprint? The GSA currently owns or leases 360 million square feet, more or less, in over 8000 buildings. Reducing that footprint seems one of the very few certainties for the current Trump administration. Remember most GSA leases are short term and are subject to appropriation risk, so the GSA footprint could be reduced rapidly. Ugh! There’s just no good news in that in this prospect…isn’t our office sector already beaten to a pulp? I almost cannot imagine the Armageddon in Metro DC.
- Intangibles will matter (as they always do) and the intangibles have changed…a lot in the past few months. When market participants think that business is getting better, animal spirits are released and that in itself turbocharges transactional activity. Close calls turn into yesses and more deals will get done. That will be our reality in 2025. But as we are enjoying the mojo bump, let’s all remember that the winds of the intangible gestalt can change on a dime. There certainly is whipsaw risk in the 2026 midterms and the 2028 presidential election. Moreover, whenever the folk fall out of love with Trump and his agenda, threatening a Democratic resurgence, the intangibles will turn negative…fast. I can barely wrap my head around what a snapback Democratic victory in 2028 would mean to the markets, particularly if the Democratic party is truly in the pocket of its progressive wing. Discontinuity is always bad for our market. It could happen and it could happen earlier than 2026 if the drumbeat of public opinion turns hostile to the current administration. While a considerable part of the electorate thinks this administration is the harbinger of halcyon times, another half thinks insanity is rife within the walls of power and 1933 is just around the corner. (Remember that half of the country didn’t think that Elon had a Tourette’s moment on the stage several weeks ago). We need to keep an eye on those intangibles, but for the moment, assume we’re in Trump land for the foreseeable future and the animal spirits will range across our financial Serengeti not just in the spring of 2025, but pretty much for the foreseeable future.
Well, as I finish working my way through my list of the tent poles of the new CRE traveling circus tent, what are my takeaways? The most consequential tentpole will remain the higher for longer interest rates environment. Deregulation is sexy and might help our markets, but will hardly radically change the calculus. The other stuff? While consequential for some (and unanticipated event risk cannot be dismissed), all of this appears unlikely to result in radical change for our markets over the next several years. So, net/net for my money, 2025 and even 2026 will continue to look a lot more like 2024 than the transformational dreamscapes from the White House or the resistance.