From the get-go, long-tenor, triple-net retail and healthcare properties would see the smallest benefits from the current administration's pro-growth policies, “and could suffer valuation declines if stronger economic growth is accompanied by higher inflation and interest rates,” according to the Fitch report. “Most triple-net leases include rent escalations to provide some inflation protection.

“However, most are fixed bumps that are designed to, but do not necessarily, mirror inflation. Consumer price index-based bumps are more common in Europe.” And while investors generally view CRE as an inflation hedge, markets with unusually high vacancy, including select suburban office markets, or weaker fundamentals, such as class B malls, “will struggle to show rent growth without meaningfully stronger tenant competition for space.”

For the owners of those class B malls in particular, the border tax proposed in the House Republican tax plan could provide additional hurdles. Fitch's analysts write that “weaker retail formats,”—i.e. those most vulnerable to online competition, such as class B malls and power centers—would likely face the most pressure.

“The border tax would increase the costs of retailer inventories through a tax on imports,” according to the Fitch report. The analysts note that economists are divided on whether the US dollar would strengthen and offset the impact,” and in any event, the border tax proposal reportedly has generated little enthusiasm either from President Trump or from Senate Republicans.

Regardless of whether that tax is enacted, though, Fitch's analysts see potential headwinds for REITs from changes to the tax code. “REIT liquidity and payout ratios could come under some pressure if dividends increase to reflect the lack of interest deductibility in calculating taxable REIT net income,” they write. “The full expensing of capital costs, for example land, could offset the loss of interest deductions. However, interest expense is more predictably recurring than capital costs, though the latter may generate net operating losses that carry forward.”

REITs may become more likely to to issue preferred stock if interest deductibility is eliminated, since neither interest expense nor preferred stock dividends would reduce taxable income. “REITs do not pay federal corporate tax and, therefore, eliminating the interest deduction could improve their competitive position in the acquisition markets compared with private, often highly levered buyers,” according to Fitch's report.

On the other hand, the elimination of tax deferral through 1031 like-kind exchanges would be “a negative for commercial real estate liquidity” that would cut across all market participants, including REITs. Real estate trusts, Fitch's analysts write, have benefited from 1031 exchanges by minimizing the taxable income surrounding their portfolio recycling activities.

Hear the latest on Net Lease at RealShare's event on April 5-6 in New York City at the Essex House. Learn more here.

NEW YORK CITY—“Accelerated Growth Needed to Offset Trump Policy Headwinds,” reads the headline on a new Fitch Ratings report. While the current administration is focused on promoting faster gains in the economy, there will be pluses and minuses for commercial real estate, as well as winners and losers.

The Trump administration's prescription for growth is a mix of infrastructure spending and tax and regulatory reform. “Faster economic growth would benefit all types of CRE, but to varying degrees,” according to Fitch analysts Stephen Boyd, Steven Marks and Britton Costa. Conversely, they write that more restrictive trade and immigration policies could undermine economic growth, while supply, whether in current development pipelines or initiated in reaction to the implementation of the current administration's policies, “could offset positive benefits of a more robust economic environment.”

Boyd, Marks and Costa write that “shorter lease tenor property types,” such as hotels, self-storage and apartments, would experience the greatest cash flow growth acceleration under the Trump administration. Office, industrial and retail properties should see continued healthy rent spreads for new and renewal leases for the 5% to 15% of annual portfolio lease expirations by base rent, they write.

However, the Fitch report also cites industrial, along with retail, as having the most to lose from more restrictive trade policies. “A near-term reduction in US trade would likely reduce industrial space demand,” according to Boyd, Marks and Costa. “Ultimately, domestic manufacturing would need to satisfy consumer demand for goods if imports fall”—and they add that increasing the output of US manufacturing would take time “and could lead to wholesale changes in location demand as companies reconfigure supply chains and distribution for domestic fulfillment.”

From the get-go, long-tenor, triple-net retail and healthcare properties would see the smallest benefits from the current administration's pro-growth policies, “and could suffer valuation declines if stronger economic growth is accompanied by higher inflation and interest rates,” according to the Fitch report. “Most triple-net leases include rent escalations to provide some inflation protection.

“However, most are fixed bumps that are designed to, but do not necessarily, mirror inflation. Consumer price index-based bumps are more common in Europe.” And while investors generally view CRE as an inflation hedge, markets with unusually high vacancy, including select suburban office markets, or weaker fundamentals, such as class B malls, “will struggle to show rent growth without meaningfully stronger tenant competition for space.”

For the owners of those class B malls in particular, the border tax proposed in the House Republican tax plan could provide additional hurdles. Fitch's analysts write that “weaker retail formats,”—i.e. those most vulnerable to online competition, such as class B malls and power centers—would likely face the most pressure.

“The border tax would increase the costs of retailer inventories through a tax on imports,” according to the Fitch report. The analysts note that economists are divided on whether the US dollar would strengthen and offset the impact,” and in any event, the border tax proposal reportedly has generated little enthusiasm either from President Trump or from Senate Republicans.

Regardless of whether that tax is enacted, though, Fitch's analysts see potential headwinds for REITs from changes to the tax code. “REIT liquidity and payout ratios could come under some pressure if dividends increase to reflect the lack of interest deductibility in calculating taxable REIT net income,” they write. “The full expensing of capital costs, for example land, could offset the loss of interest deductions. However, interest expense is more predictably recurring than capital costs, though the latter may generate net operating losses that carry forward.”

REITs may become more likely to to issue preferred stock if interest deductibility is eliminated, since neither interest expense nor preferred stock dividends would reduce taxable income. “REITs do not pay federal corporate tax and, therefore, eliminating the interest deduction could improve their competitive position in the acquisition markets compared with private, often highly levered buyers,” according to Fitch's report.

On the other hand, the elimination of tax deferral through 1031 like-kind exchanges would be “a negative for commercial real estate liquidity” that would cut across all market participants, including REITs. Real estate trusts, Fitch's analysts write, have benefited from 1031 exchanges by minimizing the taxable income surrounding their portfolio recycling activities.

Hear the latest on Net Lease at RealShare's event on April 5-6 in New York City at the Essex House. Learn more here.