June 24, 2016
"CBRE expects minimal impacts from the BREXIT decision on U.S. property market fundamentals. In the short term, U.S. gateway markets will likely be viewed with enhanced status as havens for global capital, but heightened uncertainty will carry risks for both investor sentiment and the real economy. The UK, especially London, will continue to remain attractive for global investors driven by it's inherent advantages, including transparency, political stability and market liquidity. A decline in the value of the sterling could also be a catalyst for increased foreign investment in the UK."
-Spencer Levy, CBRE's Head of Americas Research
After more than 40 years of membership, the British people have voted to leave the European Union (E.U.). Over the short-term, economic impacts from this decision will likely be somewhat muted in the U.S. As such, impacts on America’s property market fundamentals should be minimal. However, volatility in financial markets will maintain the potential for greater spillover effects on real estate markets.
Economic and geopolitical implications
The vote to leave injects additional uncertainty during an already uncertain time for the global economy. Given this reality, CBRE will be providing clients with the latest insights on a dedicated website.
There is no precedent for a country to leave the E.U., but once the British government formally declares its intention to leave under article 50 of the Lisbon Treaty, the U.K. and the E.U. have a two-year period to negotiate details of the split before all E.U. treaties “cease to apply to the state in question.” This will be the case unless all parties vote to extend the deadline.1
However, it is important to note that the process of leaving the E.U. will not commence immediately. In his address following the referendum’s results, Prime Minister David Cameron announced his resignation, which will be effective by October, and indicated that his successor will lead the formal exit process. Consequently, the timeline will develop over the course of the next several months. Until then, the U.K. remains a part of the European Union with no immediate changes to all circumstances and policies involved.
Going forward, there are some scenarios that could alter this course. A revised offer from the E.U. along with additional voter input remain possible. Barring these scenarios, it will be up to the new U.K. Prime Minister to carry out the will of the people as expressed by the referendum’s result. In this case, the outcome of exit negotiations will shape the broader effects of the U.K.’s departure from the European Union.
Although the political will that backs the European Union should not be doubted at the present time, one major risk comes from the outlook for the European project itself. With Europe’s second largest economy exiting the E.U., “Euroskeptics” will likely be emboldened. At the very least, this—coupled with the fact that key elections will occur next year (most notably in France and Germany, although different dynamics are in play in each country)—will create a complicated political environment less than ideal for policymaking. For this reason, it is not clear how smooth the U.K.’s exit will be, as European leaders have a vested interest in reinforcing the notion that dissolving membership in the E.U. is not easy.
On a broader level, one must consider the impact this will have on a range of issues, such as the future of global security and trade. In addition to emboldening the continent’s Euroskeptics, the referendum’s result may reinforce populist sentiment around the globe. All of this could weaken existing commitment to trade and impede further economic liberalization, which would negatively affect demand for commercial real estate.
Impact on U.S. commercial real estate markets
The effects of Brexit will play out over a long time in the U.S.2 This will affect the course of monetary policy with the Fed likely staying on hold until the implications of Brexit become clear.3 During the short term, U.S. gateway markets will likely be viewed with enhanced status as havens for global capital, but heightened uncertainty will carry risks for both investor sentiment and the real economy. If a worst-case scenario plays out (major policy mistakes leading to a recession in Europe and/or a broader loss of market confidence), demand for U.S. goods and services would decrease, negatively affecting real estate demand.
America’s office properties would be most affected by economic weakness in Europe. This is due to the fact that the U.S. runs service trade surpluses with the E.U. and U.K.4 In terms of traded goods, California, Texas and New York export the most to the E.U. and the U.K.5 However, greater demand for imported goods (supported by a stronger U.S. dollar) would help offset weaker exports affecting industrial markets.
In summary, the outcome of negotiations between the E.U. and U.K. will shape the effects of Brexit. Even considering where there is exposure, it should be stressed that in the broadest sense Brexit would only be disruptive for U.S. markets in a worst-case scenario. During the short term, a more muted impact with volatility in financial markets is the most likely result. What is certain is a higher level of uncertainty as policymakers and markets grapple with the reality of Brexit.
For more information regarding the referendum’s impacts on property markets from the perspective of our team in London, please click here.
1 European Parliament. Briefing. February 2016.
2 See CBRE Viewpoint “Negotiating the Future of Property Markets: The TPP and Commercial Real Estate.” April 2016.
3 Board of Governors of The Federal Reserve System. U.S. Senate Testimony. June 2016
4 U.S. Census Bureau. U.S. Trade in Services by Selected Countries and Areas. June 2016.
5 U.S. Department of Commerce. Trade Stats Express. June 2016.