How Presidential Elections, and Transfers of Power, Affect Commercial Real Estate

With the election in the rearview mirror, and a new administration set to takeover operations at 1600 Pennsylvania Avenue in January, it’s time to look ahead. But, one topic we wanted to explore that was relevant in the run up to the election, and should still be relevant now as we transition to a new administration, is what effects a presidential election has on commercial real estate.

During election years, it’s not uncommon for many investors to adopt a “wait and see” position due to the uncertainty of a new administration’s, incumbent or otherwise, impact on trade policies, interest rates, and tax law. Beyond the fear of the unknown, a new administration, Republican or Democrat, doesn’t necessarily lead to chaos within real estate markets. There may be, though, new policies put in place that could affect valuations and overall return on investment of commercial real estate property.

The four things most likely to be affected by a Presidential election are:

• Cap Rates
• Tax Laws
• Trade Policies
• Appreciation Rates

Cap Rates

A cap rate is a tool frequently used to indicate “the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage.” Low cap rates indicate the overall risk assessment and return on investment (ROI) are low, while high cap rates indicate high risk and high return.

Normally there are multiple factors that can affect cap rates, but during an election year there is the added variable of changes in interest rates as a new administration could cause rates to fluctuate. There is also the added risk, or reward, of the market reacting to new policies, which could affect available inventory.

Tax Laws

Depending on which party has a majority in Congress, it is not uncommon to see changes or updates to current tax laws when a new administration comes in. When looking at laws that affect commercial real estate, the ones which could have an impact pertain to credits, deductions, and liabilities. Tax laws can be a double edged sword when it comes to commercial real estate, as new deductions could make a property an even better investment, while an increase in tax liability when a property is sold will cut down on the net profit the seller makes. As of this writing there is projected to be a divided, or at the very least balanced Congress, which makes it harder for either party to affect change for tax policies affecting commercial real estate.

Trade Policies

While less likely to impact commercial real estate, trade policies can affect different segments of the commercial real estate market. Varied industries or regions can be disrupted by changes in trade protocol with a foreign country, which could trickle down to users and owners of commercial real estate.

Appreciation

Appreciation rates can be affected by the uncertainty an election year brings, as commercial property prices tend to rise slower in an election year as the market waits for the election results. Historically, this has benefited property buyers.

Other Potential Impacts

What elections don’t do is upend commercial real estate returns. A recent report which pulled National Council of Real Estate Investment Fiduciaries Property Index data from the present back to the 1970s, showed that ROI for institutional investors tended to do well under both Republican and Democratic administrations, averaging better than 8.5 percent annually. The report shows that investors should focus on economic cycles, interest rates, and developments in relation to COVID-19 to determine property and leasing trends, and fundamentals.

The election, ultimately, won’t have an immediate impact on the real estate market. While investment markets will be affected, those effects will happen over the course of the administration’s time in office, and will hinge on how policies affect spending trends that drive growth and industry.

That doesn’t mean industry professionals aren’t watching the election closely, though. In a survey conducted by Berkadia, both investment sales professionals and debt professionals said that the election was one of the most important issues impacting multifamily. There is possibility for disruption in the multifamily market if eviction moratoriums continue and there is no program put in place that backstops landlords.

While we could see changes to the 1031 Exchange program and the Opportunity Zone program under the Biden administration, the long-term effects won’t be felt for a few years, until we see how the market reacts to the laws and policies the new administration puts in place. Regardless of political leaning though, investors should feel confident that their commercial real estate investments should perform well, no matter which political party is in charge.

COVID-19 and Investment Real Estate: Apartments

The COVID-19 Virus has made a giant impact on the health of people around the world. We encourage everyone to be vigilant and follow the guidelines in place to protect oneself. Not to minimize the health effect, these articles will be about COVID-19’s impact on real estate, which is our expertise. The stock and bond market is widely transparent on a minute by minute basis and we hope to provide a transparency into the real estate market. Check back each week for a new look into how COVID-19 is affecting the commercial real estate industry.

In a retrospect, it will be easy to see how the path for COVID-19 was forthcoming, and took some time to hit domestically. But, from the reaction of the stock market, it felt like the impact was overnight. The week that followed was a rollercoaster, but the same cannot be said for the investment real estate market. The reality is that until we see a string of real estate closings we will not be able to pin point the actual market in the investment world. For many apartment owners though, it’s business as usual.

The investment world of commercial real estate has long been a hot market. Nothing speaks that fact truer than apartments. Fueled by historically low vacancy and interest rates, investors have flocked to that asset class, which has driven up the per door price, and driven down the capitalization rates.  In addition, apartments have been seen as an investment class that is protected from some of the concerns in the larger real estate economy. “Everyone needs a place to live,” and, “Amazon cannot take away the need for apartments,” have been phrases of conventional wisdom.

In speaking with investors this past week, these thoughts still prevail. They feel that, in the long run, apartments are one of the safer asset classes out there. Some investors have even made plans in this low interest rate environment, to free up capital for more acquisitions. Others are staying put, waiting to see how the market plays out. 

There are facts that everyone agrees on, though. One is that no one is a seller right now. It is not out of concern that the market is down and investors won’t get their value, but rather that investors do not want to put their money elsewhere. The second is that investors/landlords will need to work through the next few months with their tenants with compassion, with payment plans being one solution, particularly for those tenants with jobs in hard hit industries.

When investors were asked about the impact of the order by the Governor to put off all evictions in the State of New Hampshire, again there was some common ground. Most folks believe that the tenants who will pay are going to pay, and those who will not, won’t. In the end, investors feel the impact of COVID-19 will take a little time to work through the system.

So far folks have not seen changes to their income stream, with some investors noting that they are still getting rental applications. Time will tell, but it appears that the initial reaction from the apartment sector is that the impacts have not been felt.

Are you a landlord? Let us know how the pandemic has been affecting your multifamily/apartment investments in the comments below.

COVID-19 and the Overall Real Estate Market

The COVID-19 Virus has made a giant impact on the health of people around the world. We encourage everyone to be vigilant and follow the guidelines in place to protect oneself. Not to minimize the health effect, these articles will be about COVID-19’s impact on real estate, which is our expertise. The stock and bond market is widely transparent on a minute by minute basis and we hope to provide a transparency into the real estate market.

What at first appeared to be a slow moving pandemic, snapped across our domestic world quickly to start the month of March.  Many of us faced choices on if our businesses would enforce work from home policies, and where our children would be educated and cared for during the school day.  These questions are still playing out and changing on a daily basis. 

The investment markets are in a state of flux. Stocks continue their up and down pace while investors try and get a sense of the next steps in the market. The same rapid movement cannot be said of the real estate market. By nature the real estate cycle is slower. It is a less liquid asset and it takes time to sell and have the market react to external factors. In place leases impact value, and those too take time and have long term. Finally the debt markets impact value, and again, that takes time to work through the system.

At our offices the reaction from users of commercial space have been mixed. Since the week of March 9, 2020 we have seen some folks pull back.  Some of them were expansion tenants, while others were user/buyers with new locations.  For each story of someone delaying plans there is another story of someone moving forward.

•         National users of space, with multiple leases expiring, continue their review to look at the longer picture on relocation choices. They are in the market.
•          Local users, with multiple businesses or divisions, are shifting their focus to those businesses less impacted by recent events that are in need of space. They are still in the market.

These examples may shift overtime, but they do illustrate the types of people who have businesses impacted by COVID-19, but remain in the market to find new lease space.

We will explore more of the investment real estate market over time, but the immediate reaction is, again, mixed. Some investors look at the dip in the stock market and assume that real estate should be at a discount as well, while others see a premium in the asset because of the volatility on Wall Street.  History has shown us that one week is too short of a time to take any meaningful conclusions away, because of the aforementioned speed of the real estate market. 

Certain sectors of the investment market will likely remain strong, such as those properties with apartments, grocers or medical practices. Services that are needed no matter the state of the economy. Additionally, the quality of the income stream is always important, but more so in this past week, as conversations regarding franchisee or franchisors signing of leases is becoming crucial.

This is the first of many articles we plan on distributing to our clients, customers and friends. We are all in this together, and we hope to empower you during this unprecedented time with our collective knowledge.