Britain will hold a referendum today on whether to remain in or leave the European Union (EU), popularly called Brexit for “British exit.” Polls have indicated that the result could be close, with the outcome expected to be announced early on Friday. We asked some of NAIOP’s Distinguished Fellows – an elite group of academic thought leaders from real estate programs at top universities – for their take on what a “leave” result could mean for the U.S. economy and U.S. commercial real estate, and how U.S. CRE could effectively respond to such a dramatic shift.
There is speculation about the actual impacts of Brexit but the probability is high that it would negatively impact global markets and the U.S., specifically. It would cause significant uncertainty, and markets hate uncertainty. The U.K. is the single largest cumulative foreign investment in the U.S. – about 20 percent of all cumulative foreign investment; therefore any uncertainty in the market would negatively impact the U.S. The question is: for how long? The potential impacts for U.S. commercial real estate include that the cost of capital could rise and foreign direct investments (FDI) could decrease, especially if the value of the pound decreases compared to the dollar. But, the U.S. is a safe harbor so we might see a significant flow of capital out of the U.K. into U.S. property markets, especially gateway cities, which could drive values up. The biggest concern for U.S. CRE is capital markets. Individual local markets may see little immediate impact. With change comes opportunity – and the need to be very strategic.
Executive Director, Master of Real Estate Development, W.P. Carey School of Business, Arizona State University
Brexit is one more in a series of shocks to the global economy that will have uneven implications for the U.S. An exit from the EU could signal the beginning of the end of the EU experiment and a lot of uncertainty about one of the major drivers for the world economy. As a result, the U.S. could have a weaker partner than a unified Europe but might expect some of the countries to do better. In either case, Brexit would induce a lot of uncertainty; it could cause less investment as capital allocators wait to see how the situation evolves or it could cause more capital to flow to the U.S. as investors look for safe havens.
U.S. cap rates are already at historic lows, but the U.S. has growth, rule of law and properties that are cash flowing. Even a low yield, if considered safe, can look attractive against the uncertainly overseas.
It remains to be seen how dramatic an exit or stay would be in the medium- and long- terms. Markets are just plain jumpy these days – think about the “taper tantrum” and think about where they are now. If there is an exit from the EU, there will be a lot to consider. But, even if there isn’t an exit, many of the structural challenges to the EU will not have been addressed by this vote. Regarding U.S. CRE, I’m still thinking about local fundamentals here as much more important than this outcome today.
Christian Redfearn, Ph.D.
Borstein Family Endowed Professor of Real Estate
Price School of Public Policy School
University of Southern California
Los Angeles, California
Free trade has been a critical foundation of the post-World War II global economy, allowing national economies to specialize and grow faster. The possibility of Brexit challenges that consensus. The direct impact of Brexit will mostly be felt by Britain and the EU and will probably have a minimal direct impact on the U.S. economy and U.S. commercial real estate. The risk is that other countries will copy Britain and impose trade barriers. The most exposed U.S. sectors will be export businesses (e.g., aerospace, agriculture, technology), port-related industrial property and the financial industry.
Gerard Mildner, Ph.D.
Director, Center for Real Estate, Portland State University
Marie Ruff is Communications Senior Manager at NAIOP.