Public policy effects on real estate, part two - by John Rynne

My January article was titled Public Policy Effects On Real Estate. Little did I know, within a few months that the tariff policy controversy would be so significant so quickly. Its effect on the stock market was significant but even more so on the bond market. Since April 1^st the 10 year treasury increased by 48 basis points when I was writing this article. Everyone has some knowledge why tariffs are implemented: A) To protect the home country’s industries & B) Raise revenue. Before federal income tax was implemented in 1913, tariffs were one of the biggest revenue generators for the U.S. federal government. According to the Trump administration, besides raising revenue, tariffs are needed to even the playing field to protect U.S. industries.

It’s probably too naive to state that there should be equal tariffs between countries because of the differences in the strengths of individual country’s currency. China not long ago devalued their currency to get an edge in trading. When a country devalues their currency it gives them an advantage in world trade because their goods become cheaper to countries with stronger currencies. So the stronger currency countries can buy more of the weaker currency country goods and services. It also works in reverse. The weaker currency countries are less apt to import goods and services from the stronger currency countries. Over the weekend, I heard an interview with a western New York county executive who stated that because the U.S. has 10 times the population of Canada, it’s not fair to have a tariff policy which has an advantage over a smaller populated and Gross Domestic Product (GDP) country. The flaw in that logic is that the U.S. has a population and wealth advantage over almost all of the 195 countries in the world. The problem is our national debt is over $36.7 trillion. Within the last few years our federal debt increased $1 trillion every 100 days. If we had a trade surplus with each country the grand total of tariff revenue could be substantial and reduce debt accumulation. But more than that, the U.S. could have an indirect boom in, as an example, vehicle manufacturing. According to Peter Navarro who is part of Trump’s trade policy team, a $50,000 American manufactured car costs approximately $65,000 in Germany. This is mild compared to other countries in which that $50,000 American car can cost $80,000, $140,000 and $180,000 in other countries like China, India and Vietnam, etc.

As cited earlier, 10-year treasuries have increased mortgage rates again which will increase overall cap rates and decrease values. The bond market got cautious because there was less confidence in the stability of the American economy which started a sell off of treasury bonds by large purchasers like China. In order to stop the resistance to buying these treasuries, rates were increased to attract buyers. The increase in 10-year treasury rates have a substantial effect on mortgage rates. This will decrease real estate values in the short run.

There were other public policies pursued by the Trump administration which in the short run will negatively affect real estate. The reduction in the federal work force along with canceling leases of mainly office space leases will put pressure on an already post COVID-19 stressed national office market. Many government leases have a termination clause which states that if funding is stopped the lease can be terminated. This was partially offset by the administration’s demand of having remote federal workers coming back into the office. The office market already is weak in Upstate New York, but better than the national average of 18.9%. According to CBRE, the 4^th quarter 2024 Buffalo area office market vacancy was 16.5% and Rochester’s 16.2%. According to Cushman & Wakefield, the 4^th quarter 2024 Syracuse area office market vacancy was 14.5%. According to CBRE, the 4^th quarter 2024 Albany area office market vacancy was 13.1%. Downstate also had some significant vacancy. According to Cushman & Wakefield, the 4^th quarter 2024 Manhattan market vacancy was 22.7%; Brooklyn office market vacancy was 24%; and Long Island was 14%. The cancellation of federal leases will have a bigger negative effect on markets like Washington DC (22.6% Qtr. 1 CBRE) which have a huge federal workforce versus a small market like Rochester.

In summary, in the short run there will be slightly higher overall cap rates and lower values. However, as the national debt improves, tariff revenue increases, and more U.S. manufacturing; this will be a stimulant to real estate values in the intermediate and long-term.

John Rynne, MAI, SRA, is president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.