Is A Republican Or Democratic Administration Better For CRE? Turns Out, It's A Tie
How much difference does the political affiliation of presidential administrations make to commercial real estate growth? Apparently, not much.
A recent study by Newmark analyzed returns on investment in CRE under the presidential administrations of the last 40 years and found little difference, but what edge there is goes to Democratic presidents. Since the beginning of the Reagan administration in 1981, the report notes, annualized total CRE returns for all asset classes have averaged 9% during the years when a Democratic president was in office (16 years) and 8.2% when a Republican was in office (24 years).
"Though there may be some correlation between the political party in control of the White House and Congress with stronger office or multifamily market fundamentals, correlation is not causation," the study notes. "There are economic and geopolitical factors that likely have greater influence. This may come as a relief to investors who are concerned about the potential impact of November’s elections on the commercial real estate market."
1980s: Split Government, Steady Growth, Major Tax Changes
The election of 1980 delivered the White House and Senate to the Republican Party, but the Democratic Party retained control of the House for the entire decade and regained control of the Senate in 1986. In macroeconomic terms, the economy had begun the decade in the tank, contracting in 1980 and 1982 but expanding again each year starting in 1983. Inflation, which was a roaring 13.5% in 1980, was tamed by Federal Reserve policy that made borrowing, including for CRE deals, extremely expensive in the early part of the decade.
Despite the division of the federal government by party in the 1980s, a number of major pieces of legislation passed, including tax bills that impacted CRE.
"Two major pieces of tax legislation, the Economic Recovery Tax Act of 1981 (ERTA) and the Tax Reform Act of 1986, had unusually strong effects on commercial real estate markets during the 1980s," the Federal Deposit Insurance Corp. reports. "ERTA included several provisions that improved the rate of return on commercial real estate and increased demand for these investments. Five years later, the Tax Reform Act repealed many of these same benefits."
CRE returns were healthy throughout the decade. Inflation beginning in the late 1970s set off a wave of demand for real estate, and CRE markets enjoyed a building boom, especially in the office sector, that lasted in some parts of the country throughout the 1980s, according to the FDIC. The rebound in 1983 and '84 was especially strong, with CRE returning 13.1% and 13.8%, respectively, as the industry benefited from a growing economy and favorable tax law.
1990s: Early Decade Pause, Then Boom
The 1990s began under a recessionary cloud, with the U.S. GDP at its worst in a decade in 1991, suffering a small but painful contraction of 0.1%. Likewise, CRE returns were down for two years, a negative 5.6% in 1992 and negative 4.3% in 1993, the last time CRE would turn in losses until the Great Recession nearly two decades later.
In part because of the recession, the Republican Party lost the White House in 1992, creating a short window of unified government under the Democratic Party until 1994, when a tremor of a midterm election delivered control of both houses of Congress to the Republicans for six full years under President Bill Clinton. In any case, the election didn't hamper a sustained period of economic and CRE growth.
Around the beginning of the 1990s, the major real estate story was the collapse of the savings and loan industry, which actually began in 1989 under President George H.W. Bush. The debacle inspired a divided government once again to act, creating the Resolution Trust Corp., which eventually liquidated the real estate and other assets of 747 failed companies with assets totaling $394B.
"Despite the significance of the 1989 collapse, in some ways its immediate ill effects were short-lived," real estate attorney Morrie Much wrote in 2010. "By the mid-1990s, an improved economy had already begun to soften the memories of previous excesses, and confidence was once again in full rebound. REITs took off, with more than 150 being launched between 1992 and 1997."
Another major bill impacting CRE from this period is the Americans With Disabilities Act, created in 1990 by a divided government. The law profoundly reshaped the design of commercial real estate projects.
"More than two decades after the Americans with Disabilities Act was signed into law, many facilities covered under this law are still being sued for their alleged failure to comply with the standards," law firm Maspons Advisory Services notes.
2000s: Growth, Followed By Panic
The Republican Party returned to the White House after the 2000 election and held it for eight years. Control of Congress during the 2000s was less stable, with the Senate controlled by Republicans for four years and the House controlled by the Democrats for four years. There was divided government for four years, complete Republican control for four and complete Democratic control for two.
A brief recession in the early 2000s didn't put much of a dent in CRE returns, according to Newmark. The lowest return of the decade was in 2002, at 6.7%, in the aftermath of the bursting of the dot-com bubble and the Sept. 11, 2001, attacks, which caused a mild recession. GDP was down to 1% in 2001 and 1.7% in 2002 under President George W. Bush. It was a decade of growth, until it suddenly wasn't and the economy crashed in 2008.
So what has the flip-flopping of Congress meant for the office market over the last 20 years? The years of a Republican-controlled Congress saw U.S. office absorption averaging 40.8M SF per year, while the years under a Democratic-controlled Congress since 2000 have recorded 6.3M SF of negative office absorption per year, Newmark reports.
"With this small data set, it would seem that a Republican Congress generates more office demand than a Democratic-controlled one," according to the study. "However, the fact that a correlation exists between Republican control and higher office demand does not necessarily mean that Republican control was the cause of increased demand."
One of the decade's major pieces of legislation impacting CRE came in 2002, with the enactment of the Sarbanes-Oxley Act by a divided government after a number of major corporate scandals, such as Enron and Worldcom. In the real estate industry, SOX impacted REITs most of all, requiring them to make various adjustments to their internal controls and increase their disclosure.
2010s: CRE Recovers Faster Than The Economy
The deep recession that began in 2008 lingered well into the new decade, ushering in full Democratic control of the White House and Congress for the first time since 1994. But it didn't last.
Republicans flipped the House in 2010, the Senate in 2014 and the White House in 2016. But the Democrats flipped the House back in 2018 and the White House in November, with control of the Senate undetermined until 2021.
Overall, divided government has been more common than not in the most recent decade, but with heightened political polarization, fewer major legislative initiatives have emerged.
During the shorter periods of unified government, a few major CRE-impacting bills have been passed. The Affordable Care Act, passed by a Democratic government with no Republican support, has arguably affected health care real estate in a lasting way. The Tax Cuts and Jobs Act of 2017, passed by a Republican government with no Democratic support, created opportunity zones, a CRE investment vehicle.
CRE made a quicker recovery from the Great Recession than much of the rest of the economy. From 2010 to 2014, GDP never grew more than 2.6%. By Newmark's reckoning, CRE returns were down 16.8% in 2010 but back up to 13.1% the next year. After that, until the pandemic and recession of 2020, annual CRE returns never dropped below 6%.
Newmark also notes that during President Barack Obama’s eight-year term from 2009 to 2017, multifamily effective rents were up an average 2.7%, significantly higher than the 20-year average of 2% and the 1.6% average under the Republican presidents between 2001 and 2019.
"While this data would seem to show that Democratic control was more favorable for multifamily market fundamentals, as is the case with the office market, it is likely that exogenous events are a more powerful influence on the multifamily market than are the policies of either major political party," Newmark concluded.