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 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.

Millennials are Changing the Face of Commercial Real Estate

Everyone is talking about millennials today. Economists, pundits, politicians and business people have all weighed in, as their generation became the largest proportion of the overall workforce in 2015.

What effect, if any, is this having on the commercial real estate market?

Many of the most significant effects are driven by this generation's dramatically different habits of work, play and travel. From alternative commutes to remote work, any business that employs millennials needs to address these factors and structure their organizations and real estate accordingly.

The rise of telecommuting

Simply put, millennials love telecommuting and working from home. Deloitte's 2016 Millennial Survey confirmed a few key insights about them:

●     43 percent of millennials currently have the ability to work from home.

●     75 percent would like to and think it would positively impact their productivity.

●     88 percent want the opportunity to work with flexible hours, starting and stopping on their own schedule.

The practical effect of this is a reduced need for office space on any given day. In some cases, employees will share desks or rotate freely through dynamic, open-plan offices. Senior millennials in executive positions are equally enthusiastic about this dynamic - according to Deloitte, 56 percent of those in this category enjoy the ability to work remotely and on a flexible schedule.

Moving forward, scaling up an enterprise and hiring new staff won't necessarily obligate a business to acquire the same square footage they might have needed before. 

New priorities for location and lifestyle

Just because millennials don't prioritize office space the same way, however, doesn't mean that CRE professionals can't market to them effectively. One of the biggest differences between them and previous generations is their decreased willingness to endure long commutes.

Millennials just aren't as car-centric as their parents in general - in fact, a study from the University of Michigan showed that only 60 percent of 18-year-olds now hold a driver's license, down from 80 percent in the 1980s. An analysis of millennials' driving habits versus those of Gen X and Gen Y by a professor at the University of North Carolina found that the reasons for this were varied, but a changing - and largely negative - view of cars was responsible for as much as half of the decrease in total driving miles.

As a result, many young people must be willing to compromise in other areas, including the neighborhoods they live in and the size of their houses and apartments. A business that seeks to hire a significant number of millennial employees should take these factors into account.

In addition, increasing use of mass transit changes the favored location for an office significantly. Spaces near major commuting and transport hub may continue to rise in value, while those located farther afield in places where commuting by car is the best option may see demand drop.

How to tackle these changes

It's time to break with some of the conventional wisdom of how to manage partnerships seeking office space and commercial real estate. Increasingly, these businesses will be staffed, managed or even owned by millennial entrepreneurs.

It's critical to understand your local geography and get a grip on how people are commuting, where they prefer to work and how far they're willing to go.

The market may be changing in several key areas, but that doesn't mean opportunities are going away - you just need to know where to look.  

Sarah Carson, Marketing Director

scarson@nainorwoodgroup.com 

NAI Norwood Group