The Congressional Makeup Matters So Much In CRE. But This Year, It's Really All About The Stimulus
Real estate leaders always keep a wish list of industry-specific things they’d like to see enacted after a big election, and savvy professionals track congressional races closely, knowing commercial real estate-relevant policies come out of the legislative body. But although there is an ongoing controversy over the fate of a cherished industry tax break, what they most want this time around are measures that would impact the whole economy.
“Naturally, the [congressional] elections could have a dramatic impact on numerous policies that directly and indirectly affect commercial real estate, such as the size and scope of any upcoming stimulus, potential rules and restrictions imposed to battle the pandemic, positions on racial and gender equality, and potential changes to the tax code, including 1031 tax-deferred exchanges,” Marcus & Millichap Research Services National Director John Chang said.
But the coronavirus pandemic crushed several key sectors, especially restaurants and hotels, that underpin commercial real estate, and securing help for a wide range of beleaguered businesses will be the focus over the next few months.
It will be up to a deeply divided Congress to sort out how much, if any, relief is sent. And the desperate state of the economy leaves little room for the ordinary lobbying normally seen in government corridors.
Congress has a significant impact on commercial real estate. Among its myriad CRE-relevant powers, it can issue regulations around lending, set up tax programs like opportunity zones, determine infrastructure spending that can affect a site’s viability or appeal for development, and have a say in how building owners manage and transact their properties through regulations like the Fair Housing Act. If the Senate flips from majority Republican to majority Democrat in this election, CRE could theoretically see significant shifts in how it can operate.
“In a normal year, we would probably be focused on things like preserving the 1031 exchanges, because we know they work and help drive investment,” American Hotel & Lodging Association President and CEO Chip Rogers said. Democratic presidential candidate Joe Biden has said he would do away with the 1031 Exchange program. “But that is not nearly as important as what we in real estate face right now, which is many businesses actually going out of business.”
Rogers estimates that of the roughly 8 million jobs in the hospitality industry, about 2 million have been lost since the pandemic either shuttered hotels or dried up travel. The industry already has a 30% unemployment rate, he added, and without the type of relief provided by last spring’s CARES Act, a $2.2 trillion economic stimulus passed by Congress, another 1.7 million jobs are at risk, and about half the nation’s hotels could close.
The entire economy faces similar threats, and digging out of this hole won’t be easy, according to JLL Chief Economist Ryan Severino. In normal recessions, prices eventually fall far enough to spur consumers to start buying again, and business activity gets a jolt. But that’s unlikely to happen now, as businesses can’t fully reopen until the pandemic ends.
“Until then, government spending will remain critical to plugging the hole left by the private sector in several important economies,” he said.
Rogers’ AHLA wants the federal government to help small businesses access funds already committed toward business relief, he said. That includes the $130B in unspent funds from the Paycheck Protection Program, which many small companies have shied away from due to confusing rules. And for larger businesses, AHLA wants the government to simplify its Main Street Lending Program, a mechanism created by the CARES Act that could support up to $600B in lending for businesses with up to 15,000 employees. By late August, the Federal Reserve had only kicked in less than $500M, according to a congressional report.
To further expand lending and help businesses weather the storm, Rogers is open-minded about what strategy to take. The AHLA supports the HEROES Act, a $3 trillion stimulus package passed by the House in May, because that would mean another $290B in small-business loans. Other proposals introduced since the spring include the RESTART Act, a rare bipartisan effort sponsored in the Senate by Democratic Sen. Michael Bennet of Colorado and Republican Sen. Todd Young of Indiana, which would give small and midsized businesses more flexibility on how they spent funds, as well as providing longer-term loans.
The months-long political struggle over a stimulus package drew some clear lines. The House Democrats under Speaker Nancy Pelosi pushed for the massive HEROES Act, but it was blocked by Senate Republicans, who eventually crafted their own, much smaller stimulus, one that would funnel about $1 trillion into the economy. That would seem to plant real estate interests, along with other suffering businesses, on the Democrats’ side. But Rogers doesn’t see it that way.
“We of course support candidates who support our industry, but they are in both parties,” he said. “And I understand why there is some controversy around the HEROES Act.”
Pelosi’s bill included many items that Republicans said had nothing to do with the coronavirus threat, including student loan relief, as well as more funding for higher education, agriculture and the U.S. Postal Service.
The political pressures caused by the approaching election have gotten more confusing with each passing week. President Donald Trump torpedoed negotiations over the stimulus with a tweet on Oct. 6, but quickly reversed himself. He then called for the parties to agree on a set of much smaller proposals targeting businesses such as airlines, and eventually settled on a more comprehensive $1.8 trillion package. Senate Republicans further muddied the waters on Tuesday with a $500M stimulus plan, which could come up for a vote next week.
A Democratic sweep, with former Vice President Joe Biden taking the White House and Senate Democrats winning control of their chamber, could eventually lead to the bigger stimulus proposals winning out.
But a lame-duck session in Congress would happen first, Rogers pointed out.
“The losing party may not have the impetus to do much,” he said.
If there’s further delay, hotels and other businesses will face a long winter, possibly with a worsening pandemic and deteriorating economic conditions. That’s why AHLA’s chief focus is getting businesses quick relief before the election, even if it’s a smaller, more targeted program, rather than the upcoming election and its possible impact.
“We’re asking Congress to find the two or three things everybody agrees on,” he said.
“We’ve already seen iconic hotels like the Hilton Times Square close, and the Palmer House in Chicago, which has been there for 100 years, was foreclosed on,” Rogers added. “Without help, what’s bad is about to get much worse.”