Why real estate stocks took a hit as developers cheered Trump

Will Donald Trump, the property world's native son, tank the real estate market?

The day after Trump's reelection, even as builders and landlords personally celebrated his win, investors had a grim answer. Property stocks fell 2.6% that day, making real estate the S&P 500's worst-performing sector. D.R. Horton, the largest U.S. homebuilder, fell 3.8%. CBRE Group, the commercial real estate services firm, fell 4%, while American Tower, which owns wireless communications infrastructure, fell 7.7%

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Economists worried that an immigration crackdown would shrink a construction workforce that relies heavily on foreign-born labor. "Look up to the roofs and see who's doing the work," says Anirban Basu, chief economist at Associated Builders and Contractors.

"Same thing with folks who paint homes or hang drywall. It's difficult to know if they're documented or undocumented, but a lot of them woke up in the morning, went to the Home Depot parking lot looking for work," Basu added.

Bond traders bet that comprehensive tariffs would inflate the broader economy and slow the pace of rate cuts, dampening hope for a recovery in home sales and a lifeline for office landlords. Many real estate stocks have recovered, with an index of homebuilders' shares rising  Monday to recover its losses since Election Day.  

"If he manages to get through the policies that he's proposing, that will be really bad news," says Desmond Lachman, an economist at the conservative American Enterprise Institute. "If you get the macro wrong, if you promote a worldwide recession through tariffs and create doubts in the bond market through your fiscal policy, you can deregulate or do what you like, but that's going to come back and bite you." 

Still, homebuilder confidence reached a seven-month high in November, according to a sentiment index. And real estate owners appear to be celebrating the return of one of their own, a businessman whose desire for a flourishing economy would — they expect — outweigh his less productive instincts. "I can't say we have very good certainty," says Jeff Holzmann, chief operating officer of RREAF Holdings, which owns apartment buildings and hotels. "What we do have is confidence. We believe this is going to work out very well."

The buoyant mood reflects the central tension of the pre-inaugural period, in which it's hard to know whether Trump's cabinet picks will even be approved, let alone how they'll attempt to carry out the president-elect's campaign promises. For the real estate crowd, that means anchoring hopes for tax cuts and deregulation. Across-the-board tariffs are "more of a negotiating tactic," says Henry Manoucheri, chief executive officer of apartment landlord Universe Holdings.

And, optimists say, any immigration crackdown will stop short of depriving builders of construction labor. "I don't think you'll see police officers driving to construction sites and checking IDs," says Isaac Toledano, whose firm BH Group specializes in building luxury condominiums in Florida. "He wants to see interest rates coming down. He'll fight inflation."

Real estate's affinity for its developer-in-chief goes back decades, to when Trump was a socialite, bestselling author and reality television star. Jim Tobin, CEO of the National Association of Home Builders, remembers Trump making an impression on his members at an industry conference in 2016. "In the speech he said, 'Everything I learned in life, I learned at the foot of a homebuilder, my father,'" Tobin recalls. "That was so powerful for our members."

The first Trump administration delivered key wins for the industry. The Tax Cuts and Jobs Act, which Trump signed into law in 2017, created a deduction for business partnerships that benefited many real estate firms and a new way to defer and eliminate capital gains by investing in underserved communities through the creation of "opportunity zones."

This time around, Trump has promised to reverse one aspect of the 2017 tax bill that rankled the industry, by restoring deductions for state and local taxes. And unlike his Democratic opponent, Kamala Harris, he's viewed as unlikely to push for a national rent control law or end the like-kind capital gains tax break treasured by real estate investors.

Builders are also banking that Trump will lessen industry regulation. Research from the homebuilders association and the National Multifamily Housing Council, another trade group, found that complying with regulations accounts for more than 40% of the costs of constructing a new apartment building and adds 24% to the cost of purchasing a single-family home.

"I have been a builder my entire life, I understand the problem, and I will fix it," Trump said at an Arizona campaign rally in September. "My objective will be to cut the cost of building a new home by 30% to 50%, and much of it is regulation." How he'll do that is unclear. While he can loosen federal environmental rules that add to permitting time for developers, for example, building regulations are largely carried out at the local level.

The lack of concrete details did little to deflate a buoyant atmosphere at a real estate conference that Ari Pearl, founder and CEO of PPG Development, a South Florida developer, attended on the day after the election. "The excitement in the air was palpable," he says. "The biggest question I get asked today is 'How can I get to the inauguration?'"