'Positive Mojo' Amid Election Confusion
The 2020 presidential election remained undecided Wednesday as commercial real estate executives watched both the results and confusion roll in through the wee hours of the morning.
Millions of ballots have yet to be counted in the race between President Donald Trump and former Vice President Joe Biden, in an election that will determine the path the country takes in its recovery from the coronavirus pandemic and the economic downturn it has caused.
“If we’re in a state of uncertainty that does last for some time, that could lead to some increased market volatility and constrained economic activity,” Oxford Economics Chief Economist Gregory Daco told Bisnow at 11:30 p.m. ET. “If it’s just a couple of days, then it won’t be a game-changer for the economy, but if we have to wait a long period of time, that creates uncertainty around the credibility of the results. … That’s another wave of uncertainty.”
“The economy should probably continue to grow to varying degrees irrespective of who goes on to win,” JLL Chief Economist Ryan Severino told Bisnow Wednesday at 8:30 a.m. ET. “[But] if the outcome feels like it’s been delegitimized, then that could be a further drag on the economy and the real estate market. While it's important to get this right, the longer we wait to get the result, the worse it could be for the economy.”
Other real estate experts Bisnow interviewed were less concerned by a continued lack of decision, with many saying the industry has been dealing with uncertainty all year and that the success of properties depends on much more specific underlying factors.
“It's difficult to process where we are right now, but I think the real estate industry is resilient enough that it doesn't matter who wins,” Collete English Dixon, executive director of Roosevelt University’s Marshall Bennett Institute of Real Estate, said in an interview at 10:15 a.m ET.
Clayco is a national design-build contractor based in Chicago.
Clark expects individual sectors will continue to perform based on the fundamentals that have been shaping them all year, regardless of what happens.
“We've been seeing a drawback of capital from projects in the sectors you'd expect — hospitality and retail, for example,” he said. “Where we're still seeing positive mojo is in the industry and distribution sectors. None of that is going to be affected by the election, even if it isn't decided for a while. The uncertainty is there, regardless.”
“The presidential election can be overblown. The fundamentals of the real estate industry are born at the local and regional level,” Stream Realty Partners Regional Managing Partner Preston Young told Bisnow at 10:50 a.m. ET. He is based in the Houston office of Stream, a full-service real estate company.
“Even so, in any financial market, uncertainty is always negative,” Young said. “It's never positive. It's important to have closure. The election needs to be settled one way or the other. That's always the case, but even more so in 2020.”
Trump, speaking from the White House just after 2 a.m. ET, said he believed he had won several states that news outlets had not yet called and said he planned to take the election to the nation’s highest court.
“We were getting ready to win this election. Frankly, we did win this election,” Trump said. “So our goal now is to ensure the integrity for the good of this nation. This is a very big moment. This is a major fraud in our nation. We want the law to be used in a proper manner. So we’ll be going to the U.S. Supreme Court.”
Trump did not clarify what his path to the court might be. Republicans have launched legal challenges to mail-in ballot counts in multiple battleground states.
“If this drags on and heads to the Supreme Court, then that will become a much more significant issue,” Colliers International National Director of Research Steig Seaward said at 9:30 a.m. ET Wednesday. “Because then you have to look at potential civic unrest, which will affect things. But if it takes just the rest of the week, I doubt that will impact people’s decisions on whether to buy buildings or lease space — people will continue to wait until the final results are in.”
“If it remains an orderly process of continuing to count votes and figuring out who won, I think the markets and our economy can keep on moving forward,” Walker said. “I think if all of the sudden something triggers either social unrest or one of the candidates decides to jump ahead of the results and say, ‘I’m the winner,’ and then that gets into legal battles, that would be probably less good.”
As the likelihood of recounts and court battles grew Wednesday morning, IIRR Management Services CEO Jeff Holzmann showed less confidence in how commercial real estate will hold up.
“My concern is the next 60 days,” Holzmann said at 9 a.m. ET. “What are we doing for pandemic relief, what are we doing for forbearance? Uncertainty is the worst; nobody will transact now.”
IIRR is a crowdsourced investment and property management firm that oversees multifamily, hotel, office and shopping mall properties, with over $2B in assets under management.
“I have deals scheduled to close, and if there’s no president, I know that will cause a huge problem because my deal partners will not want to make a final decision without knowing the outcome as it pertains to the CARES Act or something else,” Holzmann said. “So if it goes longer than a week, then it could get very bad. And I’m hearing very similar things from other people.”
“I think people are going to go and do business,” Peebles said. “This is going to end quickly. There will maybe be legal contests. Hopefully, that won’t be the case, but I think there will be a declared winner in the next day or two.”
Huffines Communities founder Phillip Huffines, a Dallas-based developer and Trump donor, was at Trump’s election watch party at the Trump International Hotel in D.C. Speaking with Bisnow at 12:50 a.m. ET, he said the mood was optimistic.
“Everybody’s excited for four more years of our president, but everybody’s still cautious,” Huffines said. “The states are so tight … and no one wants to get overconfident until the returns are in and we win. But it’s celebratory. I think a lot of folks thought it was going to be a landslide; it’s 100% contrary to the pollsters. It’s a tight race, so we don’t want to get overconfident.”
The election results came in closer than the polls projected, with Trump and Biden each retaining nearly all of the states their parties won in 2016. Trump won key swing state races in Florida, Ohio and Iowa, and Biden won Arizona, according to the Associated Press.
But the remaining uncalled states that will decide the race are Pennsylvania, Wisconsin, Michigan, North Carolina and Georgia. The vote-counting has been delayed by the surge in mail-in voting caused by the coronavirus pandemic, and it remains unclear when the states will complete their final counts.
Biden took the stage just before 1 a.m. ET and said he feels optimistic about the outcome and will wait until every vote is counted.
“I am here to tell you tonight, we believe we’re on track to win this election,” Biden said in front of a drive-in crowd in Wilmington, Delaware. “We knew because of the early vote this was going to take a long time. … It ain’t over till every vote, every ballot is counted.”
The uncertainty didn’t spook the markets throughout most of the night. As of 3:21 a.m. ET, the S&P 500 futures were down 0.01%, while the Dow Jones was down 0.63%. The Nasdaq futures were up 1.78%. Asian markets remained relatively stable overnight.
The election uncertainty only adds to the volatility of a year in which the world has faced a global pandemic and economic crisis. The U.S. has experienced a resurgence of the coronavirus over the last month, with daily cases reaching new record highs over the last week.
Biden has criticized Trump for his handling of the pandemic and has said he would take more drastic steps, such as expanding testing, producing personal protective equipment, mandating universal mask-wearing and providing national guidance for business reopenings. Trump over the last week has repeatedly said the U.S. is “rounding the corner” on the pandemic, and he has called for states to roll back restrictions on public gatherings.
Congress failed to pass a long-awaited coronavirus relief bill ahead of the election, and it is unlikely to pass a bill while the result remains uncertain. Senate Majority Leader Mitch McConnell said Friday he expects Congress will wait until early 2021 to pass a relief package. The Democrats have called for more overall spending during negotiations, and if Biden ultimately wins, it could lead to a larger stimulus bill after the inauguration.
Peebles, who described himself as a “fiscally conservative Democrat,” said he thinks Biden would provide more relief to some of the states with the nation’s largest real estate markets, such as New York and California.
“Having those states on financial footing is a real benefit to the industry,” Peebles said. “I think you’re going to get Biden to help stabilize the budgets by providing some significant federal relief. I think Trump has shown that’s not where he’s going, or at least not to the degree these states and cities believe is necessary.”
While most of the attention is on the race for the White House, the Senate also appears up for grabs heading into Wednesday. As of 3 a.m. ET, Republicans and Democrats each held 47 Senate seats, according to the Associated Press, with contested races remaining in Maine, North Carolina, Michigan and for both Georgia Senate seats.
The outcome of the race could have wide-ranging implications for U.S. economic policy and the commercial real estate industry.
A Trump victory would mean the continuation of an economic policy agenda many commercial real estate leaders have supported. He would keep in place the lower corporate income tax enacted with the 2017 Tax Cuts and Jobs Act, and he would continue his efforts to roll back regulations.
If Biden prevails in the election, he will look to make significant changes to U.S. tax policy. He has proposed increasing the corporate income tax rate from 21% to 28% and has called for ending the 1031 exchange program, a favorite among real estate investors, to help fund a $775B child care and elderly care plan. He said he would eliminate the lower tax rate for carried interest, which would affect partnerships that own commercial real estate, and he has proposed increasing taxes on inherited real estate.
Huffines said he feels confident Republicans hold the Senate, preventing any sweeping changes to tax policy. He said this affects his deal-making strategy in the coming weeks.
“We have two sales pending, and whether or not we push those sales forward as hard as possible to make sure they close in 2020 instead of 2021 [depends] on who controls the Senate,” Huffines said. “Because if the Democrats control the Senate and the White House ... Biden said he’d raise capital gains, and there’s a high probability he would make it retroactive back to Jan. 1, so we’d have to close our deals by the end of the year.”
Maintaining the status quo in the Senate could also be a positive sign that stimulus can reach the restaurant industry more quickly, according to Atlas Restaurant Group CEO Alex Smith, a restaurateur based in Baltimore, whose brands include Azumi, The Bygone, Tagliata, The Elk Room and Harbor East Delicatessen & Pizzeria in Maryland, Texas and Florida.
“The restaurant industry got a win, in that the Republicans are going to hold the Senate and the Democrats are going to hold the House,” Smith said in an interview around 9:45 a.m. ET Wednesday. “A stimulus will come quicker, because it's already been negotiated most of the way through. Part of the stimulus will probably take the form of another [Paycheck Protection Program] for restaurants. I firmly believe that. Trump will be president until January and he'll sign it, win or lose.”
But JLL’s Severino is less optimistic about a quick deal.
“I think the main issue [if the Republicans keep the Senate] is that it will be objectively more difficult to pass some kind of large fiscal policy measure,” Severino said. “I haven’t completely ruled out the possibility that one might exist and obviously we’ll have to see how the presidential and Senate races play out. It seems like irrespective of who wins the presidency, we’ll have an objectively challenging environment in Congress.”
Some sources Bisnow interviewed stressed the significance of alignment between the president and Congress when it comes to relief negotiations.
“It makes less of a difference to me as a larger investment manager whether it’s a Republican or Democrat-controlled Congress,” IIRR’s Holzmann said. “It makes more of a difference if they’re aligned with the White House, because [otherwise] you have a political conflict over something as necessary as the CARES Act … I just need them to pass something so my renters can get a cash infusion, so that I can maybe get forbearance from my lenders, and I can get new financing from Fannie [Mae] and Freddie [Mac], and I can keep my business alive.”
“If there was a Democratic sweep, which doesn’t look like it will happen, it would be a bigger impact than a sweep the other way,” Colliers’ Seaward said. “The most likely outcome would be a split between the House and Senate, and if Biden wins the presidency without full control of the House and Senate, the next relief package won’t be nearly as large as otherwise.”
The opportunity zone program, created as part of the 2017 tax law, will likely remain in place under either administration, but they could take starkly different approaches in revising the program. Democratic leaders have called for stripping the OZ designation from affluent census tracts and prohibiting investments in luxury rental properties, while the Trump administration has expressed support for a proposal to allow governors to increase the number of opportunity zones in their states.
The types of environmental regulations put on commercial properties would also vary widely depending on the result of the election. Trump has called for continued regulation reduction, while Biden’s $2 trillion sustainable infrastructure plan would bring a slew of new regulations. He has called for creating a national set of building standards to reduce carbon emissions, potentially meaning 4 million buildings across the country would need to be retrofitted.
While Trump had some high-profile commercial real estate executives in his corner, Biden received more financial support from the industry at large.
As of Oct. 23, Biden’s campaign received $34M in contributions from individuals in the real estate industry, while Trump’s campaign received $23M, according to the Center for Responsive Politics. That gap widened significantly after Sept. 8, when Biden maintained a $17M to $16M edge in real estate industry donations.
While the uncertain election result could create volatility in the coming days — or even weeks, English Dixon and Walker said they don’t think it will fundamentally change the commercial real estate market, as it is a long-term industry where most profits aren’t made overnight.
“In my personal opinion, some of the issues involved in getting us back to health and work — key components of the real estate industry — would be better dealt with under a Biden administration rather than a Trump administration. But overall, this industry can withstand whatever happens,” English Dixon said. “Even if the uncertainty about the election drags on for weeks, that will have no long-term impact on real estate. We've been in uncertainty for months now. A few more weeks won't matter.”
“What happens in the next two to three days is not going to make or break any fortune,” Walker said. “Someone might get a good trade-in on putting on a financing, someone might buy a REIT stock when it goes down a little bit and it goes back up. There’s money to be made here, but in the underlying industry nothing’s going to change between now and next Monday when we likely will know who the next president of the United States is.”
UPDATE, NOV. 4, 10:10 A.M. ET: Comments have been added from Atlas Restaurant Group CEO Alex Smith, JLL Chief Economist Ryan Severino, IIRR Management Services CEO Jeff Holzmann, Colliers International National Director of Research Steig Seaward and Roosevelt University Marshall Bennett Institute of Real Estate Executive Director Collete English Dixon.
UPDATE, NOV. 4, 11:20 A.M. ET: Comments have been added from Clayco Executive Chairman Bob Clark and Stream Realty Partners Regional Managing Partner Preston Young.