Global stock markets rallied sharply last Monday after Biden was declared the U.S. president-elect over the weekend, and the recent news of Pfizer’s coronavirus vaccine has also added fresh tailwinds to investor sentiment. With the election proving closer than expected, most indications now point towards a split government next year. And while we’re still waiting for some final results to come in—most notably the two Senate runoff races in Georgia on January 5, 2021—generally speaking the dust is settling on what has turned out to be one of the most contentious elections in U.S. history.
So where does all this leave the commercial real estate industry? Much remains to be seen, but investors have several reasons to be cautiously optimistic about the future. Below we cover our key takeaways from the 2020 election and what we believe investors should be aware of.
Real estate investors should be monitoring the Senate, not the President
Before we dive into the potential impact of Biden’s policy agenda, it is important to note that the outcome of presidential elections rarely has an acute, long-term effect on real estate markets. A report from Newmark Group which analyzed real estate returns over the past four decades under various administrations, found that annualized total returns averaged 9% under Democratic presidents and 8.2% under Republican presidents.
Compared to the presidential election results, the composition of the Senate and House will likely have a much more significant impact on the country’s legislative agenda. That being said, historically speaking commercial real estate investment returns have depended more on macroeconomic and asset class fundamentals rather than political party leadership orientation. As a result, the ongoing impact of COVID-19 will remain the primary influence on overall economic performance, and we believe hard assets will likely continue to benefit from the Federal Reserves’ commitment to maintaining low interest rates, which will remain in place regardless of who holds the Oval Office, until labor markets approach full unemployment.
Investors can expect more federal spending in 2021
Given the current situation, a prolonged contested election may pose a downside risk to the economy and to the health of property markets. While concerns of widespread civil upheaval immediately following the election were overblown, there is still the possibility of short-term civil unrest akin to the flare-ups this summer over the coming weeks, which would likely have some effect across most markets.
That being said, President Trump’s numerous post-election day legal challenges have not gained much traction in the courts, and even if ballots are recounted in contested states like Georgia, Arizona and Pennsylvania, historically speaking hardly any U.S. electoral recounts have resulted in a significantly different outcome. As a result, we believe that it is a relatively safe assumption that Biden will be inaugurated on January 20. This has several key implications:
1. A larger stimulus bill: Biden is expected to push for another stimulus bill, which will likely include direct stimulus payments to a broad swath of Americans and reduce financial pressure on renters and small business owners. A larger federal stimulus package would likely boost real estate demand in the near term, and more aid to state and local governments may reduce downstream pressure to raise taxes on real estate across a broad array of impacted submarkets.
2. A more coordinated effort to tackle COVID-19: With the U.S. experiencing its largest COVID-19 outbreak to date, the time to act is now. However, it is unclear what if any coordinated effort is being made to mitigate this issue at the federal level, and despite the sporadic records set by the stock market this year, the national economy cannot fully recover until COVID-19 is resolved. The Center for Disease Control & Prevention has yet to announce whether it will extend its moratorium on evictions once it ends in December, and in the absence of clear policies and stimulus approval we expect some challenges for renters and landlords alike in the final weeks of 2020.
Biden’s recent announcement of his COVID-19 task force and persistent support for a nation-wide mask mandate signals a marked shift in the current administration’s approach. Therefore, while the nation is in need of assistance today, in the very least we know that COVID-19 will be a stronger focus for the next administration if the issue has not been mitigated by January. Additionally, there is widespread hope that newly developed vaccines such as the one Pfizer recently announced will lead to a quicker-than-expected recovery for real estate and beyond.
3. More large-scale federal projects: While there are serious doubts that Congress will approve Biden’s more ambitious policy suggestions, large economic shocks have historically been followed by large expansions in federal initiatives in the U.S. As a result, it’s worth noting that Biden’s platform calls for $5.4 trillion in additional federal spending over the next decade on a variety of ambitious initiatives, with education and expanded healthcare coverage featuring prominently.
While the potential consequences on increased education spending remain ambiguous from a real estate perspective, if enacted expanded health insurance coverage will likely increase demand for medical spaces located closer to currently underserved consumers and spur the conversion of defunct retail properties. Additionally, Biden has proposed $1.6 trillion for infrastructure and R&D, which is widely expected to benefit office and industrial real estate demand. Furthermore, progressive housing policy initiatives such as tying federal funding to zoning changes to spur affordable housing development in suburban locales as well as increased affordable housing subsidies, could present unique opportunities for residential real estate.
A split U.S. government historically results in more stability
In general, markets have responded favorably to the election results so far, since split governments typically lead to a tempering of both parties’ ambitions, both in terms of federal spending and on the regulatory front. As a result, while a Biden presidency and Democratic Senate would enable Biden to enact substantial portions of his agenda, if Republicans retain the Senate as expected, then Biden’s hobbled agenda will likely have a more diluted effect on commercial real estate and the economy as a whole.
In addition to reducing the likelihood of massive policy changes which may disrupt or depress the markets, a split government will also reduce the chances that Biden will pass several of his proposed policies which might negatively impact real estate investors’ bottom line. For instance, Biden would not be able to pass any sweeping tax measures such as the elimination of the carried interest deduction and the 1031 exchange—which Biden has previously expressed interest in abolishing.
As a result, Trump’s 2017 tax plan and all its personal and corporate tax cuts will likely remain in place under a split government, and the full extent of Democrats’ proposed overhaul of trade policy, housing, education, health care, environmental regulation and broader regulatory policies will likely not be actualized in full, if at all. . According to J.P. Morgan, this political gridlock is likely to benefit asset prices over the medium term, and CBRE based its 4.5% GDP growth forecast for next year on a split-government scenario.
Avoid political punditry and focus on the fundamentals
The October jobs report and Q3 GDP figures indicate that the U.S. has made significant gains on the road to economic recovery. However, the recent surge in COVID-19 across the country and continued uncertainty regarding who will control the Senate in 2021 have led to political infighting and legislative inaction which threatens to undermine what the nation has accomplished to date.
Aside from a few Senate matches the election is essentially over, and next year will likely see a much more stable, albeit gridlocked, federal government. As a result, investors are advised to avoid focusing on the ongoing political theater and instead divert their attention to identifying resilient asset classes such as multifamily and industrial real estate assets, which have the potential to hold value and generate passive income over the coming years.