Some CRE Leaders Warming Up To Potential Joe Biden Presidency Despite Tax Hike Concerns
With the presidential election less than 10 weeks away and the political conventions putting the candidates in the spotlight over the last two weeks, the commercial real estate industry is taking a closer look at which direction it wants the country to go.
The industry at large has given more money to Republican candidates, but some commercial real estate leaders said they are increasingly comfortable with the prospect of a Joe Biden presidency.
Biden's selection of Sen. Kamala Harris as his running mate has given some business leaders confidence that a Biden administration would take a moderate stance on economic policy. Leaders also say the control of the Senate could be the larger determinant of the level of change that occurs in the next administration.
Commercial real estate companies have largely benefited from the tax cuts President Donald Trump signed into law in late 2017, and there is concern that a potential Biden administration would roll back those cuts. Investors are also worried about the possible elimination of the 1031 Exchange program, an idea Biden's campaign has floated.
But when it comes to the challenges the country faces this year, from the coronavirus pandemic to the economic recession to social unrest, industry leaders feel Biden is better equipped to help the nation recover.
The real estate industry has contributed more than $208M this election cycle to federal candidates, parties and outside groups as of Aug. 21, according to the Center for Responsive Politics. Roughly 58% of the industry’s contributions went to Republicans, while 42% went to Democrats, according to CRP.
Many of the largest contributors were industry groups, such as the National Association of Realtors, the National Multifamily Housing Council, the Mortgage Banking Association and the National Apartment Association, each of which split their contributions between both parties, according to CRP.
“We’re bipartisan and work with both sides, so were very focused on making sure both the Biden campaign and the Trump campaign understand the important priorities for the industry, and also the types of things that impact our ability to provide the housing that’s needed,” National Multifamily Housing Council Senior Vice President for Government Affairs Cindy Chetty said.
In addition to wanting to stay neutral, she said the association sees positive and negative aspects of each campaign's plans on housing.
“There are things we like about proposals the Biden campaign has put out in its housing platform, and there are things that are concerning to us, but that goes the same for the things the Trump administration has put out," she said.
The companies that have contributed the most money include Marcus & Millichap, which gave nearly $11M, and Simon Property Group, which gave $5.7M, both primarily to Democratic candidates, according to CRP. Companies with major donations directed toward Republicans included Hillwood Development, which gave $4.1M and Crow Holdings, which gave $1.7M.
Biden has consistently outpaced Trump in national and swing state polling. Biden is currently beating Trump in national polling by a 49.6% to 42.5% margin, according to the Real Clear Politics average. The RCP Average of the six key battleground states has Biden ahead by 3.7 percentage points.
The polling has led some industry leaders to begin preparing for a Biden victory. Dean Hunter, a D.C.-based broker and founder of the Small Multifamily Owners Association, is preparing to launch a group called Commercial Real Estate Professionals for Biden. His aims are more practical than ideological, as he says the industry needs to back the candidate that is more likely to win.
“It is imperative that commercial real estate professionals are involved, particularly with the winning candidate,” Hunter said. "The numbers look like Biden is going to take this thing away … We need to be involved in the process now in order to have influence later.”
The industry has warmed up to Biden more since his selection of Harris as his running mate. Walker & Dunlop CEO Willy Walker said he had been concerned about Biden potentially picking Sen. Elizabeth Warren and what that would have meant for economic policy, but he said the industry should be relieved about the Harris pick because she is more of a centrist.
Walker, in an Aug. 13 interview, said most industry executives he talks to expect Biden will win the presidency, and the big question they have is which party will control the Senate, which could determine whether sweeping changes to federal tax policy will occur.
“I hear a lot of people say what’d be ideal is a Biden presidency, but Republicans keep the Senate so the tax laws can’t get changed,” Walker said. “There are a lot of people who are fearful that if it’s a Biden presidency and a Democratically controlled Senate that you get another tax bill that unwinds the Trump tax reform."
Fears Of Rising Taxes
One of the signature legislative achievements of the Trump administration has been the Tax Cuts and Jobs Act, passed in late 2017. Commercial real estate leaders who have benefited from a lower corporate tax rate are concerned that some of the tax reforms could be rolled back under a Biden administration.
Biden has called for raising the corporate tax rate from 21% to 28%, increasing taxes on U.S. companies' foreign income and implementing a new 15% minimum tax that would prevent companies from using tax breaks to reduce their bills to lower levels, according to The Wall Street Journal.
While large companies generally oppose tax hikes, they are especially vulnerable in an economic recession when any increases could create more distressed situations, Sage Policy Group CEO Anirban Basu said.
When Trump's tax reform law passed, the commercial real estate industry was performing relatively well in occupancy, rental rates and revenue, Basu said, and the tax cuts helped improve an already strong sector.
But today, the coronavirus and economic recession have created a host of issues that make the financial situation for real estate companies much more tenuous.
"Now commercial real estate is in crisis: abandoned storefronts, emptied office suites, shuttered restaurants and many retailers in bankruptcy," Basu said. "These are challenging times. If one were to impose on top of that higher tax burdens, that could become deeply problematic and probably would result in a lot of fire sales of commercial property."
Local and municipal budgets have faced massive revenue shortfalls this year and need help from the federal government, and Peebles said many executives understand tax increases may be necessary to provide that support. But he said he would want to see that federal support come with restrictions on how cities can allocate the money to avoid wasteful spending.
"I do think that there is going to be significant pressure to increase federal taxes, and I think that businesses and wealthy individuals can be persuaded to support that if the policies are clear on what the spending is going to be for," Peebles said. “If a Biden administration goes in and tries to increase taxes without imposing any kind of restructuring on cities that are going to be beneficiaries of tax increases, I think there’s going to be a lot of backlash.”
The Biden administration could make one change to the tax code that would benefit commercial real estate: repealing the SALT tax increase.
The Democratic-controlled House voted in December to eliminate a cap on state and local tax deductions that was included in the 2017 tax law. This has disproportionately hurt the high-tax states where many of the nation's largest commercial real estate markets are located, Basu said.
"If you want to help commercial real estate, one of the ways to do that is to take away that $10K limitation on state and local government tax deductions because that will stabilize the population of some of these Northeastern communities, and that will support better commercial real estate outcomes," Basu said.
Another section of the tax code that has commercial real estate investors concerned is the 1031 Exchange program.
Biden's campaign has proposed eliminating the program, which allows investors to avoid paying taxes on real estate sales when they use the money to buy another property. The proposal would generate revenue that would help pay for his child care and elderly care plan.
This could hurt the real estate market not only by forcing investors to pay more taxes but by removing an incentive for them to deploy their gains back into real estate assets, Basu said.
"If you have a situation in which a lot of people are having to sell real estate and no longer have an incentive necessarily to recycle that money back into the real estate sector, the overall effect is to take liquidity and capital out of real estate," Basu said. "That diminishes valuations, and valuations had already been diminished by poor macroeconomic fundamentals."
Hunter said maintaining the 1031 Exchange program is one of his top priorities, but he said the proposal should not be a reason for real estate professionals to oppose Biden. Instead, he said they should support him now so they can have sway to push his administration to abandon the idea when in office.
"The 1031 exchange was risked under a Republican administration," Hunter said. "We’re going to have to fight to keep that, and one way we could do that is by supporting the winning candidate."
Healing The Nation
The United States this year faces a pandemic that has killed more than 180,000 people, a recession that has left more than 10 million people unemployed and the largest reckoning on racial justice in more than half a century.
Each of these issues affects the commercial real estate industry, with people cautious to return to offices and retail establishments, struggling companies downsizing their leased footprints and protests filling the streets around some of the nation's most expensive real estate properties.
Some commercial real estate leaders say Biden would do a better job leading the nation in recovering from these challenges.
On the pandemic, Walker said Trump has already proven he cannot lead a national strategy to respond to the coronavirus.
"Until we beat this virus, this country and this economy can’t move forward," Walker said. "Unless we get a national strategy on how to beat this pandemic, we can’t move forward as a country and we can’t move forward as an economy. And the Trump administration has clearly shown they are incapable of doing that. So that piece in and of itself I think is the most fundamental issue people are going to be focusing on come November."
Peebles said he thinks Trump made the mistake of downplaying the virus in an attempt to calm the nation, and that created the impression that he wasn't taking it seriously. He said he thinks Biden would have had a more predictable and consistent response, but he would still like to hear more details on the former vice president's plans to address the health crisis.
"I do believe we are in a real crisis in the country for a number of different reasons, and we are at a crossroads in terms of the country and getting out of this pandemic," Peebles said. "We're struggling with a global pandemic. I want to hear more from Vice President Biden, who is a very good man, someone I know well.
"I want to hear more about his plan for getting us out of this."
Congress left for recess this month without passing another coronavirus relief bill, a move Chetti said was disheartening. She hopes Congress and the president will reach a deal before November, but if it does not, the outcome of the election could determine the size of the relief package.
“The Democrats have a $3-plus-trillion package they’re looking at, and Republicans have a $1 trillion package, so if it’s still a divided government, I think you’ll come somewhere in between the two," Chetti said. "If the House, Senate and White House are Democrats, then the priorities will, I think, change.”
The parties have struggled to reach bipartisan consensus on a coronavirus relief strategy, and Peebles said he thinks Biden could help the Democrats and Republicans reach an agreement.
"One of the things about Biden is he's a centrist Democratic, he's always been a pro-business Democrat," Peebles said. "I think he's capable of bringing the parties together and he could do that better than Trump."
The issue of racial justice has a major impact on the prosperity of the nation's major cities, and thus its largest real estate markets, Peebles said. The protests have created concerns for real estate owners with billions of dollars in assets on the streets where the demonstrations are taking place.
He said Biden would better address the racial inequalities that people are protesting, and his personal style makes him better equipped to calm the tensions rather than inflame them.
“If you look at where the wealth and values are concentrated in commercial real estate, it's urban centers ... and so where those major investments are is where protesting is taking place," Peebles said. "I think the industry is recognizing that can have a more chilling impact than tax policy, and I think that’s why our industry is beginning to, and you’re going to hear more people, take a second look at Biden.”