Real estate has been among the weakest-performing economic sectors since President Donald Trump took office, even without the negative impact of planned policy shifts some feared might undercut the industry.
At midyear, Trump's promised healthcare reform is in limbo as Congressional Democrats and Republicans lock horns over the repeal of the Affordable Care Act, and the president's planned tax code overhaul is still a work in progress with little clarity about what shape reform ultimately will take — or if it will even manifest this year.
"To be honest, nothing has played out as I expected, really for the last 12 months," said Jacques Gordon, global head of research and strategy for real estate investment manager LaSalle Investment Management.
In an interview, Gordon said the "Trump bump" in the broader markets has not shown up in real estate.
"I think real estate investors, perhaps, were either more skeptical, or just a little slower off the mark … waiting to see if the earnings and all the optimism really showed up in the kinds of things we look at, like leasing and rent growth," he said.
At the start of 2017, there was fear that the tax provisions that have long benefited the real estate sector — mortgage interest deduction, carried interest, and 1031 "like kind" exchanges, for example — might be targeted in legislators' tax reform efforts. That prospect now seems diminished, according to Tyler Horton, managing director at the consulting firm Alvarez & Marsal Taxand LLC and a member of real estate lobbying group The Real Estate Roundtable.
This week, the Roundtable held its annual meeting, but Horton said no clarity emerged from it about what the draft tax legislation will look like, or when it may land.
"There is no question that they are listening to the concerns of the real estate industry, that they appear to understand its size and impact on the economy," Horton said of congressmen and staffers in attendance. "But they, as you would expect, didn't make any promises."
Horton said the recent tax reform conversation has focused largely on the border adjustment tax, the controversial proposal to tax the full cost of imports and exempt exports to spur economic growth at home. He said there has been "enormous resistance" to the proposal, not only in the real estate community but among all industry groups. Without the border adjustment tax, however, it is difficult to determine how legislators will "pay" for reduced headline corporate tax rates that Republican lawmakers want, he said.
Horton added: "It really is, at this point, a lot of wait-and-see."
LaSalle's Gordon similarly does not expect tax reform to materialize this year. Whatever shape reform ultimately takes, it will likely have the appearance of a "grand bargain," he added. Real estate-friendly provisions, specifically, are not likely to be a target.
The prospect that legislators would go after 1031 exchanges, in particular, seems unlikely, he said, referring to the decades-old tax code provision that allows property owners to sell an asset and acquire a replacement without incurring a tax liability on any capital gain.
"I have a hard time thinking anyone would focus on the 1031 exchange," Gordon said. "It's not a big needle-mover to raise revenue in the larger U.S. economy."
In a recent analysis of the impact of Trump's policy proposals on real estate, Gordon cited the administration's proposed caps on legal immigration, via the H-1B visa program, as a concern for the multifamily and office sectors, and Trump's proposed healthcare reform, which could eliminate subsidies many Americans rely on to obtain health insurance, as a potentially significant negative in the medical office space.
Gordon continues to advise a wait-and-see approach for real estate investment. But there is reason to be optimistic, he said. Real estate, with its contractual income streams and lower volatility, tends to a beneficiary of turbulent political and economic climates. In the long run, the fundamental business and capital markets cycle matters much more for real estate than the policy initiatives of any single administration.
"As important as the Trump policies may well be to real estate investment, other things are also very important, and they will continue to be, regardless of who is president," he said. "Things like the growth of e-commerce, the growth of the U.S. economy, innovation and technology spending — a lot of those don't really have anything to do with who is in the White House."