Alabama economists predict Brexit could ultimately benefit state’s real estate markets

The United Kingdom’s historic referendum to exit the European Union last week sparked worldwide reaction.

It is safe to say that world markets did not react positively to Britain’s future exit from the EU, which will be negotiated over the course of the next 24-plus months.

Once the initial shock wears off, economists are mixed about the long-term effects of Brexit.

“The actual divorce of the U.K. and the E.U. will play out over two years or more,” said Robert Dietz, chief economist and senior vice president for economics and housing policy for the National Association of Home Builders. “And it remains a possibility that those separation proceedings will continue to enable free trade between the U.K. and Europe, as well as ongoing rules concerning cross-national workers. However, the U.K. Treasury forecasted significant domestic GDP declines due to Brexit over the next 15 years, and while those estimates may be biased to the high side, spillover effects to the U.S. are possible.”

The U.S. housing sector is one where some economists see potential benefits over the long run.

“The only way it could have an impact on housing and lending markets is through U.S. treasuries,” said Ahmad Ijaz, executive director and director of economic forecasting at the University of Alabama’s Culverhouse College of Commerce. “If the demand for treasuries goes up, it will push the interest rates lower, in turn pushing the mortgage rates lower, which is actually good for the U.S. housing markets.”

Speculation continues as to whether the Federal Reserve’s Federal Open Market Committee will continue to raise interest rates throughout 2016.

“Following its meeting earlier this month, the Fed cited risks associated with the Brexit vote as a contributing factor in its decision not to raise rates at that time,” noted commercial real estate firm Marcus & Millichap in its special report, Brexit Surprise Has Silver Lining. “With the outcome of the British vote decided, the potential for a July increase has been virtually erased, and the probability of a September hike has fallen significantly. In conjunction with the decline in Treasury rates and reassurances of liquidity, commercial real estate investors could benefit from low lending costs. Although lender spreads generally widened in the aftermath of the Brexit vote, interest rates remain highly favorable for investors.”

Ijaz said to expect some long-term impacts from Brexit in the currency markets and the restructuring of business models for firms already established in Britain.

“Most of them will be structural changes, which eventually will work out over time,” Ijaz said.

When it comes to a direct impact on Alabama, Ijaz said exports to Britain compose only about 3 percent of all Alabama exports.

“The only way it would affect an Alabama business is if they were set up in Britain to do business over there or with other EU countries,” Ijaz said. “It could have an impact on their business models.”

As for the short-term effects on the commercial real estate market, Marcus & Millichap sees minimal impact from the Brexit vote.

“Apartment demand in the second quarter appears quite robust, with positive demographics and long-run hiring momentum supporting the sector,” the report said. “The outlook for office and retail properties is more mixed, depending on how consumers and businesses perceive the news. Should confidence falter, demand for these property types could soften modestly, but restrained construction will remain an important factor supporting the performance of these asset types. Industrial properties are positioned to benefit from the Brexit as the strengthening dollar could lift imports of foreign goods, though potential downsides exist for U.S. manufacturers that export.”

Like with the housing market, Marcus & Millichap said the commercial real estate sector could see a boost if interest rates remain low.

“Downward pressure on interest rates will benefit investors, while the appeal of hard assets with favorable yields could draw additional capital to the sector,” M&M said. “The depth and duration of volatility surrounding the event will significantly influence the ramifications for investment real estate. However, barring an unanticipated major economic setback or consequences stemming from the Brexit, the prospects of significant downside risk are limited.”