Brexit: The Americas View

US real estate executives are cautioning against short-term reactions to Brexit, Britain’s Thursday vote to leave the European Union.

While Europe must contend with a host of short and long-term unknowns, conversations suggest that the private US real estate market is preparing for some changes – not all of them negative – as a result of last week’s decision. Multiple executives noted that Brexit has triggered a wave of chaos in the global stock markets, which could lead to even more of a flight to safety in the US real estate market, which foreign investors already had regarded as a safe haven long before the referendum.

“Volatility in other asset classes (equities, foreign exchange) could make US real estate that much more appealing, particularly if the diminished prospects of the Federal Reserve tightening create attractive financing conditions domestically,” wrote Heidi Learner, Savills Studley’ chief economist, in an internal note Friday.

However, she cautioned that lower rates do not guarantee banks’ willingness to lend. Learner also predicted that some current trends in the domestic real estate market will continue, such as elevated valuations and accelerating cross-border capital flow into the US.

Brian Ward, chief executive of Atlanta-based Trimont Real Estate Advisors, echoed Learner’s comments in an interview with PERE. He recommended monitoring the long-term end of the interest rate curve for upward movement, a sign of a concern. Ward also advised watching economic indicators such as job growth and wage growth to understand how the economy is responding to Brexit, though he said he is not concerned about the erosion of those fundamentals.

“It’s too soon to make recommendations,” Ward said. “We are helping our clients through the immediate volatility. We’re not making any long term recommendations to clients in terms of how they should reposition their books.”

Some US-based investors have likewise said they are not rushing to react to Brexit. The California Public Employees’ Retirement System (CalPERS), the largest US public pension, issued a statement Friday about the outcome of the vote.

“We don’t fear or panic in these types of volatile markets; we actually trade into them when opportunities present themselves,” said Ted Eliopoulos, CalPERS’ chief investment officer, in a video. “We’re closely monitoring those events and will take advantages of the opportunities that present themselves over time.”

In the face of a falling pound and potentially diminished real estate demand, US real estate managers with exposure to the UK are now more likely to retreat to their home market, Colm Lauder, a vice president at real estate data provider MSCI, told PERE.

“We could be talking up to a lost decade” in the UK real estate market, he said. “If you’re trying to sell investment in the UK now, that wouldn’t be an enjoyable job.”

Lauder and Kevin Thorpe, chief economist for real estate services firm Cushman & Wakefield, both recommended looking to the stock market as an indicator for real estate. A prolonged correction, Thorpe said, could have wide-ranging consequences including weaker exports for US-based firms, which would hit industrial real estate, among other sectors.

“The upshot that we’ve learned over the years is that whenever there’s a lot of volatility in the global markets, there’s a flight to quality in the US,” Thorpe said. “Global capital could pour into the US more aggressively now, which could have the effect of keeping interest rates low and driving values higher than we were expecting.”

He also noted that oil prices could drop due to weaker demand expectations, which would be a positive for the US real estate market. In addition to oil prices, he recommended that real estate investors monitor consumer confidence, which he said is one of the strongest predictors of commercial real estate.

“If Brexit scares the consumer and we see consumer spending start to drop, that’s the dark scenario we’re all dreading,” Thorpe said. “Barring that, I think you could come out (of Brexit) in reasonably good shape.”

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