Real estate transactions hit pause awaiting Trump effect

Economic and political uncertainty sparked by the election of Donald Trump has caused some real estate transactions to stall, and that could ding investors' returns.

The fourth quarter usually is the busiest time of year, as buyers and sellers rush to complete transactions. Generally, one-third of a year's transactions activity occurs in the fourth quarter, said Jim Costello, senior vice president of New York-based real estate research firm Real Capital Analytics Inc.

Commercial real estate sales already had slipped 43% year-over-year through October, Mr. Costello said.

Before the election, RCA executives were tracking 34 transactions worth at least a combined $20 billion expected to close by year end.

Anecdotally, money managers said, after the election buyers and sellers started to reassess deal terms in light of 10-year Treasury bonds inching up, an expected interest rate increase and uncertainty spawned by Mr. Trump's election. The resulting lower prices negatively affect investors' returns.

“Buyers that have been pursuing transactions at a certain price are the hitting pause button,” said Robert Byron, chairman and co-founder of real estate money manager Blue Vista Capital Management LLC, Chicago.

The buyers are wondering if they should pay the same price they had agreed to if the cost of financing the deals will go up, Mr. Byron explained.

Rising interest rates alone do not usually cause buyers to revisit the price, he added.

Interest rates on U.S. Treasury securities moved up significantly since the election, making financing property transactions more expensive, Mr. Byron said. This caused a chilling effect on normal deal activity, he added.

“It will take time for real estate transactions to resume to a steady pace,” Mr. Byron said. “How long it will take for that to settle out remains to be seen.”

But that delay could cause transaction prices to fall and deals to take longer, and that could potentially cut into institutional investors' returns, he said.

While transaction activity this quarter at Chicago-based real estate money manager LaSalle Investment Management is still strong, overall global transaction volume is down 10% to 15%, said Jacques Gordon, global strategist at LaSalle.

Indeed, real estate transactions were down across Europe in the third quarter, RCA data shows.

For example, 2015 was a record transaction year for Italian real estate, with 70% of the capital invested from overseas players, RCA data show. But deal volumes were down in the third quarter of this year and totaled a modest e650 million ($688 million) so far in the fourth quarter because of uncertainty regarding the Dec. 4 Italian constitutional referendum, RCA analysis said.

“Some (real estate investors) are moving more slowly,” LaSalle's Mr. Gordon said.

Before the recent stock market recovery there wasn't as much capital available to invest in real estate these days because the drop in the stock market had caused investors' real estate portfolios to surpass their target allocations, he explained.

“The real estate markets are not frozen,” Mr. Gordon said. “Could it freeze with a series of geopolitical tremors? Sure it could, and the kinds of things that could throw us into a freeze-up are out there.”

For example, LaSalle executives are following Mr. Trump's statements and tweets concerning international relations, which could affect treaties and capital flows, he said.

The possibility that the Trump administration could spearhead ending trade treaties or that Mr. Trump could make “intemperate comments” creating an international incident are wild cards the investment community are watching out for, he said.

“We don't see that escalating to a dangerous level, but the early signs are troubling,” Mr. Gordon said.

In the meantime, more buyers are asking for price decreases, said Allison Yager, a partner in the Atlanta office of consulting firm Mercer Inc. and the global leader of Mercer's real estate boutique.

“Buyers are still transacting, but with slightly lower prices,” Ms. Yager said.

There are fewer bidders for properties, four or five on average per potential deal down from 15 or so last year, she said.

Part of the reason for the slowdown is that returns have been so strong that buyers are now questioning whether returns can continue rising, she said.

Investors started putting less into real estate when their portfolio values outstripped their target allocations, Ms. Yager said.

Fundraising dropped in the third quarter, when 32 real estate funds closed on $19 billion, down from 46 funds and a combined $31 billion in the second quarter, and 50 funds with $41 billion in the third quarter of 2015, according to data from London-based alternative investment research firm Preqin.

Another reason for hitting pause on some transactions is that buyers are concerned with the outcome of the U.S. presidential election in light of the June vote in the U.K. to leave the European Union, Ms. Yager said.

“With the election on the horizon people were concerned about the impact, regardless of the outcome of the election,” she said.

“We heard some transactions that were thought to have been done deals before the election fell off the table after the election.”

Many real estate investors will stay on the sidelines to see what happens on the economy and what decisions the Trump administration makes concerning the economy, tax reform and trade, Ms. Yager said. Only investors that have to sell will sell, she added.

Still, there are some positive currents, LaSalle's Mr. Gordon said. The U.S. capital market recovery since the election is an indication that investors think the new administration will cut taxes and pull other fiscal stimulus levers that would be good for real estate, he said.

The bad news is that a rise in interest rates could reduce the amount of capital flowing into real estate. That would not shut down the real estate markets but it could slow transactions while investors look for alternative financing, he said.

The latest pause comes at a strange time, Blue Vista's Mr. Byron said.

More transactions are usually closed in the fourth quarter than any other quarter of the year. Instead, there's a lull, which he expects to continue into the new year.

By the end of January, Mr. Trump will be president and investors will hit another pause in transactions while they wait and see what the world will look like, Mr. Byron said.

“It is easier for people to sit on the sidelines a bit and see how it all plays itself out,” Mr. Byron said. “So much of investment activity is psychologically-driven and some people are in a fragile state because they were surprised by the election.”