What just happened and what lies ahead in 2017

Section 1031 is not a loophole. The capital gain tax is not avoided – it is merely deferred.
Baxter Fain Managing director, Capital Markets Group-Real Estate Investment Banking, JLL, Denver

Baxter Fain
Managing director, Capital Markets Group-Real Estate Investment Banking, JLL, Denver

Well I don’t think anyone saw that coming! At least the pollsters sure didn’t. I am writing this one week after the election and you are reading this probably a month after, so even though it’s old news, it’s hard to believe. I also was thinking about the last year, and our current world champions are our Broncos, Cleveland, Pittsburgh and Chicago. The Rust Belt and the Midwest are back and won the election for Donald Trump. 2016 felt like a year of good activity with continued very low interest rates but still a lot of difficulty getting things across the finish line unless they had to. One thing is for sure, our days of easy money and ultra-low rates are over. It will be interesting to see what that does to our real estate market and if it will get people off the fence.

The line from the first “Rambo” – “First Blood” – comes to mind, “It’s over, Johnny!” Our time of the $3.5 trillion in quantitative easing done since 2008 and incredibly low rates is over. Trump has already mentioned he believes interest rates are too low and the Federal Reserve has no dry powder remaining in its vault. I think you will see a 0.25 point increase in rates in December and two additional increases in 2017, and the 10-year Treasury will approach 3 percent for the first time in years. This won’t have an immediate impact on commercial real estate values but it will come.

Trump also has made comments about banks that are too big to fail and that smaller community banks are being crippled by reserve requirements and Dodd-Frank regulations. I think you could see Glass-Steagall reenacted to separate deposit-taking institutions from investment banking. Many have said that President Bill Clinton’s repealing of Glass-Steagall paved the way for the financial crisis. I would not be totally shocked if the issue surfaced in the near term of Trump’s presidency.

In addition, something must be done to help smaller community banks support the beginning and middle-market developer and small business. I just finished a call with a “community bank” and the comment was made that the company totaling $5 million in annual growing revenues is just too small … what?! In the last six months we have seen an incredible tightening with banks and it is only going to get tighter next year. Banks are full on commercial real estate loans and their credit officers feel like we are coming to the end of the cycle, thus requiring more equity in projects but also requiring guarantor strength to be much stronger. Banks should not be put in a position to only lend to those that have so much liquidity that they really don’t need the money. Sort of goes against the theory behind “community banks” helping new businesses and owners grow in the community, doesn’t it?

Let’s talk positive now! Commercial real estate lenders and investors still feel like Denver is one of the top markets in the country and continue to be aggressive on deals here. The lending universe, other than banks, ranging from life companies, Fannie Mae, Freddie Mac, commercial mortgage backed securities lenders and other debt funds, all have increased loan volume goals in 2017 and Denver will remain a beneficiary of this. My general feeling is we are at the peak in the commercial real estate market and Denver has enjoyed the best commercial real estate market in its history in the last few years. The questions I continue to hear are: Are we overpriced in Denver? Are rents too high? Are we headed back into another recession? Are we at the top of the market and have nowhere to go but down from here? My gut is we are not headed into another “Great Recession”; we still have runway left, but things are starting to change direction. We all need to be prepared to open up the checkbook a little wider to put more equity in that next project, to pay a more historically normal interest rate and keep our market growing.

Featured in CREJ’s December 7-20, 2016, issue

Edited by the Colorado Real Estate Journal staff.