This article is republished with permission from REITCafe.
Elections usually focus on social issues, job growth, and global politics, but government policies also have a significant impact on real estate. This year, the election’s impact on real estate could be heightened because many believe that the cycle has matured. Will real estate fundamentals strengthen further or weaken after a new administration takes office in January?
The economy and stock markets are key concerns that affect property market fundamentals and real estate investment trusts (REITs). Russ Koesterich, managing director and chief investment strategist at Blackrock, has noted that the party affiliation of the president does not have a statistically significant impact on U.S. equity markets. Still, elections are times of uncertainty, which leads to volatility in broader stock markets. The FTSE NAREIT All REIT Index has dropped steadily during the past three months. A number of factors, including broader market volatility, some of which may be related to presidential election uncertainty, have likely contributed to this weakening performance.
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Interest rates are another concern. The upcoming election may be influencing the Federal Reserve’s decision not to raise rates in recent months in order not to potentially affect the election. A rate hike could occur following the election in December, but few expect a rapid increase in interest rates.
Recently published research suggests that the economy stays stronger when the incumbent party keeps the White House. In four of the five presidential elections since 1980 when the incumbent party stayed in power, unemployment rates declined and gross domestic product was higher than when the White House changed parties, according to an article published in Commercial Property Executive by Dana Gomez-Gayne and Grace Winters of law firm Manatt, Phelps & Phillips.
Real estate tax policy also is at the forefront of investor concerns. The two presidential candidates have stated ideas that could affect real estate–related taxes. Clinton has proposed capping “in-kind swaps” to $1 million in assets annually. She also wants to limit 1031 exchanges and close the provision in the tax code that allows people to step up their basis in real estate when transferred upon death. Trump wants to end the use of the step-up basis only among properties valued above $10 million.
More important to commercial developers and owners, the tax treatment of losses—previously considered uncontroversial—is drawing heightened scrutiny after last week’s revelation of a $916 million loss on Donald Trump’s 1995 taxes that could have allowed him to avoid paying federal taxes for up to 18 years. Real estate developers and owners can generate losses more easily than others because they can depreciate their property and deduct interest paid on borrowed money. Those losses can offset income from other sources like salaries. Will the new Congress limit or remove this tax provision?
This election may ultimately not have a significant effect on the real estate industry. Market volatility may subside after the election when some major uncertainty is removed. However, ongoing divisions in Congress will likely limit the abilities of both Democrats and Republicans to enact proposed policies.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 10/17/2016.