Will Brexit Impact U.S. Real Estate?

By Peter A. Elwell, CFA | July 18, 2016

In the wake of the surprising June 23rd vote by The United Kingdom (UK) to withdraw from the European Union (EU), the question continues to be asked: “What does this mean for (fill in the blank)?” Depending on who you are, who you know, where you live and where you do business, the question will take its own form, but there is a unanimous concern about the impact of this decision.

While economists worldwide have tried to offer clarity and convey reasonable expectations to help individuals wrap their minds around the situation, the unambiguous consensus is that it is too early to tell what the future holds.

Though, in an initial reaction to the news, markets across Europe, Asia and the U.S. fell dramatically; the values of the Euro and Pound slipped against the value of the Dollar; U.S. Treasury rates and mortgage rates were pushed down; many investment funds were frozen; and investors turned to bonds and gold, we’ve been reminded of past economic downturns and unsettling events that were eventually weathered by a world economy that, we believe, will again prove resilient.

In the meantime, what might we be able to expect for the U.S. and U.S. real estate?

The most significant effects should remain isolated to the UK itself.

In the June 27th article Brexit: What We Know, Don’t Know and What PE Firms Should Expect, CohnReznick reported, “The UK represents a small percentage of global GDP (less than 3%). Therefore, while the global economic impact of Brexit is expected to be relatively benign, the impact will likely be substantial for UK domiciled businesses with global operations and customer bases. Multi-national corporations with substantial UK operations will also be impacted.”

U.S. economist, Brian Rose, said in the June 24th UBS Market Alert UK Referendum Implications, “The vote has some negative implications for European growth. We now expect virtually no growth in the UK economy over the next few quarters. The hit to the Eurozone is far smaller. Our 2016 growth forecast goes from 1.6% to 1.3%. We expect minimal impact to the US and maintain our 2.0% GDP growth forecast for the balance of the year.”

The U.S. may experience an influx of foreign capital.

While many economists expect the UK to experience a recession as a result of Brexit, they believe that growth of the EU economy may slow but not ultimately slip into a recession. As a result of the uncertainty in these markets, foreign capital flows into the U.S. should increase as foreign investors pursue a flight to safety. Wells Fargo Investment Institute’s senior global equity strategist, Scott Wren, told CNBC on June 28th, “Money is going to come to the US. We have slow growth it is dependable, and the rest of the world knows that. I think you are going to continue to see money flow into the US because of this vote.”

U.S. real estate will likely attract investors.

Economist, Barbara Byrne Denham, stated in the latest REIS White Paper The Impact of Brexit on Commercial Real Estate, “Most real estate pundits agree that global investors will look to the U.S. as a safe haven for investment, even more so than they do already. This will drive up prices and lower cap rates for commercial buildings in a number of cities. Many would argue that the gateway cities – New York, Los Angeles, San Francisco and Boston – will see the highest impact, but others have cited non-gateway cities as offering the best investment opportunity since investors have not driven up prices in these markets.”

If uncertainty continues to delay investment decisions, U.S. office and retail rent growth could slow.

Denham states, “If the hysteria in the broader economy delays investment decisions significantly, and it could, this will weaken GDP and employment growth in the U.S. Lower job growth in particular will slow rent growth, particularly in the office and retail markets… We hesitate to estimate how much growth rates could fall, but we do feel confident that the vote will not push growth into negative territory.”

If uncertainty delays home purchasing, apartment demand could increase.

Denham suggests the Brexit vote could delay home purchasing, particularly in metro areas. If this is the case, apartment rent growth could increase, offsetting the inventory growth rates that have lately decreased occupancy rates.

Industry markets should remain stable.

Lastly, Denham believes, “The higher dollar will hurt exports but it will drive up imports, so trade-heavy cities (Houston, New York, Los Angeles, Miami and San Bernardino-Riverside to name a few) should not see a major net difference in trade volume. Thus, the industrial sector should not be affected as much as the other property types.”

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