Razor-Thin Margin In Congress Raises Real Estate Hopes For Lower Inflation, Bipartisanship
More than 24 hours after the polls closed on Election Day 2022, it is still unclear which party will control both houses of Congress, but it is clear that neither Republicans nor Democrats can claim to have won the broad mandate of the American electorate.
While Republicans are favored to win a narrow majority in the House of Representatives and the Senate could take until December to decide, the slim margins could slow down federal spending, potentially helping combat inflation — or open the door to bipartisanship on critical issues like the housing crisis, real estate and political insiders told Bisnow.
“It’s not looking like quite the red wave that we anticipated. We could still see a Republican House majority or a Republican Senate majority too, but it really will be a narrow margin,” Liz Osborn, vice president of public policy advocacy at Enterprise Community Partners, told Bisnow Wednesday. “What happens when you have a narrow margin of victory is you really need to work together.”
Races in key battleground states, including Nevada and Arizona, remained too close to call late Wednesday, and the Georgia Senate race will go to a runoff election on Dec. 6 after neither Democratic Sen. Raphael Warnock nor Republican challenger Herschel Walker secured more than 50% of the vote. Republicans had won 206 seats in the House compared to Democrats’ 184 as of Wednesday evening, according to the Associated Press.
Americans turned out in force to the polls — including record numbers of early voting — at a time when inflation is over 8% for the first time in four decades and economic forecasters widely expect the U.S. to fall into a recession by next year.
Experts contend that the roughly $5T in federal stimulus spending since the pandemic is at least in part to blame for skyrocketing inflation. The Federal Reserve has raised interest rates aggressively this year to try to cool the economy, which has had a chilling effect on commercial real estate.
Multiple policy and real estate experts who spoke to Bisnow said they anticipate a divided Congress will lead to a period of federal inactivity, which could help lower inflation and allow interest rates to come down faster.
“The more the works are gummed up and the less spending that happens right now, hopefully, [it's for] the better,” said Bob Beckman, the senior finance director for Colliers in Philadelphia. “Right now we need to get spending a little bit more under control so that pressure on bonds can lessen and rates can stabilize and eventually lower again. There’s no other way out of it.”
After passing a number of major spending initiatives in the first half of Biden’s term, the next two years are likely to see neither party pass major legislation before the presidential election in 2024, said Charles Bullock, a professor of political science at the School for Public & International Affairs at the University of Georgia.
“It's going to be status quo. Republicans talked about trying to claw some of [the federal spending] back, but I don’t think that’s going to happen,” Bullock said. “If some people were hoping for some cuts, I don’t think that’ll happen either."
Such a dynamic could prove to be welcome news for commercial real estate investors facing a spike in borrowing costs as a result of the Fed’s interest rate hikes, which have taken its target lending rate from 0.25%-0.50% in March to 3.75%-4% this month, with more increases on the horizon.
Those hikes have impacted commercial real estate values, with prices down 13% in October from their peaks earlier this year, according to Green Street. They have confounded investors and lenders trying to determine property values, drying up investment sales activity across the globe.
“The bottom line is that inflation is still a problem, and until that's under control, the Fed will continue upward pressure on rates,” Beckman said in an email. “If the Republicans win the House of Representatives, a split government could play a role in curtailing new spending plans — which long term can help to lower inflation — and bring rates down.”
While sweeping legislation and spending packages are unlikely to pass if Republicans take one or both chambers of Congress, some expressed reserved hope that bipartisanship could make a small comeback in Washington.
Amanda Wintersieck, an associate professor of political science at Virginia Commonwealth University, said the election could turn into a boon for moderate politicians — many of whom performed better than Trump-supported candidates. But more likely, she said, is two years of continued polarization.
“Either we have some consensus building and we have a Republican-controlled House willing to make deals with a Democratic Senate, or we have a complete roadblock and no movement on issues important to Americans,” Wintersieck said. “If the second scenario unfolds, the question will be how that plays out in 2024. More particularly: Who takes the blame for gridlock?”
“When I return from the G-20 meetings in Indonesia with other world leaders, I’m going to invite the leaders of both political parties … to the White House to discuss how we can work together for the remainder of this year and in the next Congress to advance the economic and national security priorities of the United States,” Biden said in a press conference Wednesday. “And I’m open to any good ideas.”
Enterprise’s Osborn, an affordable housing lobbyist, said one area the parties could come together on is the nationwide housing crisis. Issues like low-income housing tax credit financing or disaster relief funding funneled toward development could still be on the agenda, she said.
“I actually think there could be big opportunities for housing policy in a divided government or split Congress,” Osborn said. “Assuming the president is running again in 2024, he and other Democrats in power are going to want to showcase an agenda that they can deliver on for the next two years, but at the same time a potential new majority of Republicans in the House or Senate or both would also want to have victories under their belts to campaign on as well, so this could actually create a strong scenario for bipartisanship.”
Biden has made housing one of his administration’s priorities, releasing a Housing Supply Plan that includes loosening Low-Income Housing Tax Credit terms for new and existing projects in October and directing federal housing agencies to spend more in localities with higher density zoning.
Phillip Huffines, founder of Dallas-based developer Huffines Communities, said the prospect of additional regulation from the executive branch would dampen housing supply and further slow an already anemic market.
“You can rest assured that there’s going to be many executive orders and many rules and regulations affecting our industry, which is going to slow down our industry,” Huffines said.
Huffines, who served as the North Texas Finance Chair of the Trump Victory committee in 2020, was disappointed in national Republicans’ results this election cycle, warning that their failure to capitalize on toss-up races would hurt the national economy.
But he’s betting that businesses harmed by the downturn will continue to flock to staunchly pro-business Texas after that state’s incumbent Republicans won re-election.
“There’s going to be a day of reckoning and that’s what’s starting right now, but I don’t want to be a Debbie Downer because there’s always going to be jobs, there’s always going to be deals,” Huffines said. “That’s going to be in places like Texas.”
Gordon Strategic Advisors President Richard Gordon, a lawyer and political and strategic adviser for corporations, predicted Republicans will try during the next two years to undermine Biden’s chances for re-election in 2024.
That likely means the president will have a fight on his hands to raise the debt ceiling next year, a battle that has occurred during past periods of divided government but hasn’t yet resulted in the government defaulting on its debt. Gordon said if a Republican House doesn’t approve raising the ceiling next year, the resulting default would destroy the bond market.
“That would be a disaster,” he said. “It will significantly injure corporate America.”
Looking beyond Congress to other races around the country, several down-ballot initiatives could have an impact on local real estate markets.
Illinois voters approved a constitutional amendment allowing a right to collective bargaining, codifying labor protections for one of the country’s largest real estate markets at a time when construction pricing is still near historic highs. In Tennessee, the inverse happened, as voters approved an initiative protecting right-to-work laws in the state.
In Los Angeles, votes are still being counted on an initiative that would tax residential commercial and property sales over $5M, which several major real estate leaders have lined up to oppose. The new tax could net the city up to $1B per year toward a swath of measures designed to create and protect affordable housing and support low-income renters.
Missouri legalized the possession, cultivation and licensed retail sale of cannabis, while Maryland voters approved possession for adults over 21 years old last night. The state legislature there will likely be tasked with outlining a regulatory framework for the retail sale of cannabis in the next legislative session, the Washington Post reported.
Cannabis real estate ventures will likely boost demand for retail and industrial spaces in those states once regulations are finalized, said Todd Sullivan, a co-CEO of Massachusetts-based Cannapreneur Partners.
But while new jurisdictions coming online could create competition for border towns that formerly received business from other states, Sullivan believes the true gold rush for the sector could only come with federal legalization, which he believes is far off.
“I don't see a scenario where Bank of America, Citi, [JP]Morgan, those big banks, are going to do any cannabis direct investing until it’s federally legal,” Sullivan said.
As the dust continues to settle from Tuesday’s election, experts are trying to decipher the message that voters sent about the economy and what it could mean for the presidential election in 2024.
Wintersieck said relying on economic angst ultimately failed for Republicans in this election because pundits and pollsters may not fully understand how voters are grading their elected officials on addressing inflation.
“Most voters said the economy was the No. 1 issue. But that should’ve been a boon in the Republicans’ favor and clearly, it was not,” she said. “It suggests that we haven’t measured the nuances of what that means for voters.”
The Peebles Corp. CEO Don Peebles, a longtime Democratic donor and activist, said the success of gubernatorial candidates running on pro-business issues — especially Massachusetts Gov.-elect Maura Healey and Florida Gov. Ron DeSantis, who won re-election by nearly 20 points — should be a signal to both parties about what voters want.
“I think a better indication of where the country is going and where it is is Florida,” Peebles told Bisnow. Despite DeSantis being a Republican, Peebles said he thought he demonstrated strong leadership for the state through the pandemic, a factor that made him popular with Florida voters.
“He won by almost 20 points in a state that is almost evenly split between Democrats and Republicans,” he said. “I think that most voters understand that business creates jobs and jobs provide economic security for themselves and their families. Voters get it.”