To say that the world was shocked at UK voters’ decision to leave the European Union is an understatement.
Pundits knew the June 23 vote would be close, but most agreed that the EU would remain intact. After 51.9% voted otherwise, global equity markets entered a tailspin, losing an estimated $2 trillion in value virtually overnight and making it the worst single-day loss in history. Losses amounted to $3 trillion by the following Monday, June 27 and the pound had dropped to its lowest level in 31 years.
Markets have since recovered, but the UK’s decision to leave the EU is still expected to have tremendous impacts on the American real estate market. The full range of the referendum’s impact will be unclear for quite a while (negotiations between the EU and UK are ongoing), but economists generally agree that we can expect the following:
By and large, U.S. multifamily real estate is expected to perform well amid the cloud of uncertainty Brexit has created.
“The very illiquid nature of most real estate investments means that when the sky is falling, real estate is usually at the bottom of the ‘sell’ list,” explains economist Heidi Learner. “There are very few, if any, automated platforms for matching buyers and sellers…and the process of securing financing limits how quickly transactions can be completed.” In other words, unlike securities that can be bought and sold with the click of a button, it’s not easy to unload real estate in the aftermath of an economic shock.
Not only is a rapid sell-off unlikely, Brexit is poised to have the opposite impact: to attract investors to U.S. real estate.
In a post-Brexit survey of more than 90 institutional investors with exposure to UK real estate, 57% indicated that the referendum’s unexpected result makes it likely that they will invest less in the UK over the next 12 months. Expect those dollars to flow to the U.S., instead.
“Real estate has become much more of a core asset for portfolios than it was in the past,” says Ken McCarthy, Principle Economist with Cushman & Wakefield. “Now all of a sudden one of the major places to invest has more questions about it than it did before. In a situation like that, investors, particularly conservative investors, are more likely to look to other locations. We would expect the U.S. to be the first place they would look.”
Industry experts have differing opinions as to where foreign capital will flow.
Kevin Thorpe, another economist with Cushman & Wakefield, predicts investors “will be seeking core assets for the most part, primarily in the gateway cities” like New York City, Los Angeles, San Francisco and Boston.
“Others have cited non-gateway cities as offering the best investment opportunity since investors have not driven up the prices in these markets,” says Barbara Byrne Denham, REIS economist and the author of The Impact of the Brexit on Commercial Real Estate. In any event, an influx of foreign investment would drive up prices and lower cap rates for multifamily properties in a number of cities.
Although there is likely to be a tightening of credit overseas, interest rates in the U.S. are expected to remain low. The Federal Reserve Bank indicated it would raise rates this year, but in the aftermath of Brexit, “investors and homebuyers can expect low interest rates for longer and a pause on interest rate hikes from the Fed until at least September,” says Steve Hovland, Director of Research at Irvine, CA-based HomeUnion.
To be sure, lender spreads widened immediately following the referendum. But overall, interest rates remain highly favorable for U.S. real estate investors looking to buy or refinance existing assets. This low-interest rate environment will also benefit U.S. REITs, which are poised to outperform the overall market as investors seek security and stable cash flows.
How the referendum will affect U.S. real estate over the long-term remains unclear. It really depends on the strength of the EU moving forward.
A number of countries have already threatened to follow the UK’s lead. Whether rhetoric or real, this is likely to cause volatility in the Eurozone for the next few years. “Whenever there is global volatility, the U.S. has a pattern of benefitting from that volatility,” explains Thorpe. But, he warns, “if this devolves into a messy situation and the Eurozone breaks up…then all bets are off.”
If the EU collapses, it could lead to a prolonged downturn in equity markets and could cause serious damage to the U.S. real estate market. Business and consumer confidence would be rattled. Lower job growth, in particular, would slow rent growth. As the broader economy slows, this is when we might expect a widespread investor sell-off.
But assuming that widespread contagion doesn’t happen, Brexit’s long-term impacts could benefit the U.S. multifamily market through a stronger jobs base, increased rents and greater sales activity.
Leading up to the referendum, a number of companies—including JPMorgan Chase and Citigroup—warned that an exit would cause them to transfer at least a portion of their operations elsewhere. There’s speculation as to where these jobs will go. Many anticipate an employer exodus from Europe altogether, with jobs transferred to U.S. cities instead. The potential increase in domestic employment would boost U.S. multifamily real estate as demand for housing grows.
Multifamily rents may also rise. Jobs relocated from Europe to the U.S. are most likely to head to cities with already constrained housing markets (e.g. NYC and Boston). Housing prices would likely rise, making it harder for investors to purchase new assets in these markets—but boosting rents for existing owners of multifamily real estate.
And, although the apartment market faces overbuilding and rising vacancy rates in most metros, “if the Brexit vote prompts households to delay home purchasing, apartment demand will increase,” says Denham. “This would offset the inventory growth rates that are expected to exceed net absorption rates in most metros over the next few years and will lower vacancy rates. This could keep upward pressure on rent growth.”
Taken as a whole, and barring unforeseen setbacks, most agree that the UK’s decision to exit the EU will have few negative impacts on the U.S. real estate market. “The fundamentals of the economy are still healthy and there has been a tremendous amount of capital raised that wants to be deployed,” Thorpe explains. If anything, expect to see a momentary pause followed by a flurry of sales activity.
It seems like we’re in the midst of that pause now, which is why so many investors are feeling spooked. But multifamily investors can rest assured knowing Brexit will cause them little downside.
After all, there’s a reason why foreign investors flock to U.S. real estate during times of crisis: for its stability.Read more on Property Management Trends
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