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Brexit and Commercial Real Estate in San Diego

Posted by:  Jim Morstad
2016-09-08 11:48:58

With last week's vote in Britain to leave the European Union (EU) there has been a widespread impact on global economies. The US stock market took a dive on initial fearful reactions to the Brexit vote. However, as overall Brexit worries ease, US stocks have come back higher along with global markets. 

This event has brought to light the importance of a sound, principled financial strategy. We must remember that things are rarely as bad as they seem and that indeed, the sun will rise the next day.

In this light - and the context of commercial real estate - the follow sentiments are helpful to acknowledge here at home. While Balboa Thrift and Loan serves the Southern California market and has no exposure to foreign markets, we find these ideas helpful to remember when dealing with local borrowers' unique commercial real estate lending needs. 

 

COMMERCIAL INVESTMENT

Mark Clacy-Jones mark.clacy-jones@knightfrank.com

The decision by UK voters to leave the European Union will cause volatility across all investment markets, and real estate will be no exception.

Uncertainty over future economic conditions in the UK will cause some deals on hold to be shelved, and occupiers will reconsider the amount of space they need outside of the single market.

A fall in the value of sterling, combined with falling property values will be a buy sign for opportunistic overseas investors once the initial correction has occurred. This will cause a widening yield gap as real estate yields rise and bond rates fall from further Bank of England monetary loosening and will make property a favoured asset class in an unpopular investment destination.

 

CENTRAL LONDON OFFICES

Patrick Scanlon patrick.scanlon@knightfrank.com

The vote to leave the European Union creates both threats and opportunities for the Central London office market.

Economic uncertainty is rarely a positive for any market, and in the short-term we should expect some occupiers to delay committing to new office moves as they take stock of what the new landscape means for their businesses.

London represents the largest market for euro-denominated trading, and major banks with euro trading desks in London may find that they need to relocate some of these functions to office markets within the EU. While this does not necessarily mean a wholesale relocation, we should expect some vacant space from banks to come to the market once this restructuring has taken place.

However, it should be noted that many businesses with a large London presence are focused on markets outside the EU, and the UK’s exit from the Union will have a limited impact on them. The referendum, and possibility of Brexit, has been a live risk since the Conservative victory in the general election in May 2015. Since the general election, there has been above-average office take-up suggesting firms have adopted a business-as-usual approach; global operators such as Deutsche Bank, Thomson Reuters, Ashurst, Google and Facebook have made significant long-term commitments to London.

There is likely to be some release of office space as businesses tighten their belts to weather the period during which trade treaties are being negotiated. However, currently availability levels are particularly low and the development pipeline remains fairly limited. The market has capacity to absorb a rise in supply before there is a possibility of a fall in prime headline rents.

The impact on the investment market is likely to be less obvious. While the economic uncertainty during our exit negotiations will undoubtedly deter some domestic investors, the relative discount available to purchasers in foreign currencies will attract significant interest.

In the medium-term however, Central London commercial property will continue to offer a higher yield than most other asset classes, and may even benefit from the instability in the equity markets.

As the above graphic from Moody's Analytics shows, a Pre vs Post Brexit United States GDP remains virutally unchanged in 2016-2017. Much worry and global economic reaction help create big news headlines. But once we step back, take a deep breathe, and notice what we are working with we realize that there are still solid lending fundamentals here in Southern California.

Uncertainty creates worry and stress which can result in poor financial decisions. Remember that commercial real estate is firmly based in fundamentals. We here at Balboa Thrift and Loan use these fundamentals to underwrite and close every loan we handle. 

Jim Morstad

VP of Commercial Real Estate

jmorstad@balboathrift.com

 

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