What a difference a year can make. Last January, New York real estate’s top brass were losing their hair over a looming crisis in China. At a memorable ULI New York panel, developers bemoaned the disappearance of big-ticket Chinese investors.
But when ULI New York met again this January, China had become a source of solace. “I think the offshore capital is saving the core and core-plus markets,” James Kuhn, president of Newmark Grubb Knight Frank, said. Money for trophy towers was pouring in from Chinese sovereign wealth funds such as China Investment Corporation and conglomerates such as Anbang Insurance, and even high-risk condo projects were receiving a lifeline from Chinese investors. Suddenly, it was the U.S. that seemed unpredictable. Asked about the greatest real estate market risk in 2017, JLL’s tri-state president Peter Riguardi responded that his “biggest concern, respectfully, is Trump.”
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Donald Trump, who ran a campaign on the promise to bring manufacturing jobs back to the U.S., has managed something else first: he has repatriated real estate market worries from China.
Take interest rates and inflation. Until Nov. 8, economists seemed resigned to a U.S. economy stuck in slow-growth, low-inflation mode. Along came Trump, with his promise of debt-funded tax cuts and infrastructure spending to boost economic growth to 3 or 4 percent per year. You can bet on the Federal Reserve responding to such a spending spree – provided it makes it through Congress – by quickly raising short-term interest rates.
“I think it’s fair to say that the economic narrative has changed,” Jonathan Gray, head of real estate at the Blackstone Group, said a week after the election. The prospect of faster growth, Gray argued, would provide the real estate industry a boost that would more offset the negative impact of higher interest rates.
But what if we just get higher inflation and higher interest rates without faster growth? One famed economist, Robert Gordon, floated that scenario Monday, arguing that in an economy near full employment, any fiscal stimulus will be offset by tighter monetary policy. Higher debt costs and bond yields without accompanying increases in economic growth and rental income would be a nightmare scenario for the real estate industry.
Meanwhile, Moody’s chief economist Mark Zandi predicts that Trump’s policies may spur short-term growth, but could also worsen the next downturn.
We have plenty of scenarios on offer, from faster growth to boom-and-bust. And those are just the more predictable uncertainties. What if something truly extraordinary happens, like a major trade war, or worse? When Chinese and U.S. business leaders met at the Waldorf Astoria hotel last week to discuss bilateral trade, talk of Trump dominated.
In case we needed a reminder of the uncertain times we live in: on Monday, the Wall Street Journal published an interview with Trump in which he said he felt the dollar is “too strong” and “it’s killing us.” A day later, the dollar hit a four-week low.
It’s not that all economists and real estate executives are bearish on the U.S. economy and the real estate market – some believe both will do great under Trump. But uncertainty at home now seems to be the theme.
Contrast that with China. In late 2015 and early 2016, the country ranked among the New York real estate industry’s biggest concerns. The country’s property market was in a funk and its wobbly stock and bond markets threatened to trigger a global financial crisis. Even after its financial markets stabilized, currency outflows continued to cloud the country’s outlook throughout 2016.
But in 2017, things are looking up. In the first week of the year, the yuan had its biggest two-day gain in offshore markets since 2010, in a sign that Beijing’s efforts to stem capital outflows are working. The country’s property market is on a tear, with 10 Chinese cities recording price growth of more than 20 percent. The Economist last week pointed out that China’s economy “is sounder than it was two years ago.”
There are still plenty of risks in China’s economy, and don’t even get us started on the Eurozone. Markets are fickle. Who knows what investors will be most worried about in two months?
But at least for now, uncertainty made and manufactured in the U.S. is top of mind.
“The rooster is a symbol of good luck,” New York City’s former mayor Michael Bloomberg said at the Waldorf event. “And I think given what’s going on in the world we’re gonna need some of that.”
(Read more of The Long View here.)