By my count, the 2016 Presidential Election was a mind
numbing 596 days and included over 20 different players. We are now down to one
President-Elect and a fraction of that time to digest what that means for the United
States. Of course the President-Elect was not the only party on the ballot,
there were many more down ballot races that narrowed the balance of power in
the US Senate and gave the Republicans control of the executive and legislature
in Concord. With almost all of our federal election results in New Hampshire
being decided by the slimmest of margins with both red and blue victories, I
will wager that those reading this article have an equal chance at pleasure and
frustration. And while there are many issues that are important in the State
and throughout our Country, today’s discussion will focus on issues of concern
for real estate, mostly commercial. Spoiler alert: No one has a clue what will happen to
commercial real estate as a result of this election.
At the top of the ticket there is a New York real estate
broker President-Elect Donald Trump. He is a licensed broker, which begs the
question: “What would it be like to sit through a continuing education course
with him?” but I digress. For someone who has made his mark primarily in land,
bricks and mortar, his campaign has been very quiet on anything relating to this
sector. The closest we got was in the
second presidential debate where carried interest and depreciation were discussed.
While this may have been interesting for
someone in my shoes, it really did not help us understand what a President
Trump may do as far as changing any current taxation laws on the books.
In Donald Trump’s “Contract with the American Voter”,
released in October, he calls for “massive tax reduction and simplification” and
the lowering of the business rate from 35% to 15%. This is just one bullet out
of twenty-eight and does not expand much further, so we are all guessing on what
the details around “simplification” could mean. In a Nov 10, 2016 Forbes article, Chief Economist for the National Association of
Realtors described that he believes “trimming mortgage interest deductions
[and] reducing property tax deductions”, could be on the table with a Trump
presidency. He also added the 1031
Like-Kind Exchange could be a focus, which allows owners to sell and exchange
into a larger property, while deferring the taxes that would be owed at that
time. I may even add a redesign of capital gains on investment property to this
list.
All of this, in theory, makes sense. Mortgage interest deduction on housing,
capital gains shelter on primary homes, capital gain treatment for investors of
real estate, keeping 1031 Exchanges as is, if removed could all total up to
close to $1 trillion dollars per year to Uncle Sam. However some of the key personnel in both the
US House and the US Senate who have been pushing for reform of our tax code
have retired. Even if that challenge is
overcome, there are plenty of objections from special interest groups, not just
real estate that would push back. For
federal tax reform, there will be a push from the Republicans to reform. If it comes, I expect: a cap on all deductions
for personal returns or elimination of the “stepped up basis” at time of death
for a 1031 exchange investment.
In Concord, it does not appear that there will be a
tremendous shake up in the taxation of real estate or commercial real estate
holdings. What is of interest to owners
and occupants of real estate is the Governor Elect’s energy plan. For a typical office tenant, energy
consumption can be around 10% to 20% of their overall occupancy costs. For retail and industrial users, the costs are
much higher as the Granite State consistently is in the top 10 highest costs of
energy. Chris Sununu’s plan calls for
“increasing the availability of baseload power” and in effect increasing the
supply to lower the cost. It is not
clear if this is the path that will succeed or another option will open up, but
it is clear that our elected officials know this is on the minds of commercial
real estate owners and users.
A major theme of the newly elected officials is
deregulation. President Elect Trump
calls for two regulations to go away for every new one that is created. In real estate speak at a federal level, it
means that Republicans are sure to use their new power to
change/modified/repeal all or portions of Dodd-Frank to free up lending. The issue is such a priority that it sits in
their party platform. The theory behind
reform is that this regulation used to reign in the mega banks and was akin to
using a sledge hammer on a thumb tack for our local community banks. Some local banks claim to have responded to
Dodd-Frank regulation by shrinking their lines of business to avoid more costly
regulatory requirements. It is almost certain that the Republicans in
Washington will go after Dodd-Frank, what is unclear is how the lenders will
respond to the change and will that change lead to more capital for real estate
and business development.
Of more interest to occupants and owners of real estate is
what the Federal Reserve will do with interest rates. Even though the increase in rates does not
have a linear effect on commercial property value, there is a correlation. While December seems as likely a date as any
for a raise to the interest rate, the Federal Reserve is in a no-win scenario,
with any action or inaction likely portrayed as a political one. However monetary policy typically likes
stability prior to increase of rates. With
this election cycle being anything but stable, it would seem a drastic rate
hike is unlikely but a steady climb over 2017 will be forth coming.
What is clear is that as a result of the consolidation of
power of the Republicans in both Concord and Washington, we are likely to see a
good amount of action in the first quarter of 2017. But not even Carnac knows
what that will eventually mean for the commercial real estate market.
Chris
Norwood is a licensed real estate broker at NAI Norwood Group, Inc. a firm that
focuses on commercial real estate sales, leasing and consulting. Chris has actively
lobbied with the Realtors in Washington DC for the past six years. Chris sits
on the Public Policy committee for both the NH Association of Realtors and the
NH Commercial Investment Board of Realtors. He also sits on the Government
Affairs Committee of the Manchester Chamber of Commerce.
