'The Money's Always Green': CRE Market Watchers Shrug As Election Cliffhanger Continues
Lingering uncertainty still surrounds the 2020 presidential election as the day after the election draws to a close, but Democratic candidate Joe Biden is within a few electoral votes of being the unofficial winner of the contest, with news outlets varying between reporting 253 and 264 Electoral College votes for Biden out of the 270 required to win.
Even if he achieves that, questions remain about the finality of the outcome, as President Donald Trump has demanded recounts in close states and kicked off legal challenges. By Wednesday night, the Trump campaign had filed three lawsuits, one each in Pennsylvania, Michigan and Georgia, contesting the process for counting ballots, joining lawsuits that Republicans had already filed in Pennsylvania and Nevada.
The campaign also called for a recount in Wisconsin. That process could last weeks, with experts pointing to similarities with the contested 2000 presidential election, which was ultimately decided by the Supreme Court 36 days later.
For now, the country’s short-term uncertainty isn’t likely to have much of an impact on the CRE industry, but a continued divided government probably will, industry experts say. The blue wave that some pollsters predicted didn’t happen, keeping the status quo of a divided government in place, and possible policy changes that could negatively impact commercial real estate could also be slow to come, if at all.
The market appeared to price that risk into its performance Wednesday, with the Dow Jones gaining 367.63 points, or 1.34%, and the FTSE Nareit Equity REIT index up 0.079% by the close of trading.
What that means for commercial real estate depends on who you ask, though there are particular concerns about whether the election results would make additional stimulus by the government more or less likely. The $3 trillion CARES Act earlier this year proved to be an important prop for parts of the economy, and sources told Bisnow before the election that a still-divided government and/or a lame-duck Congress could stymie talks about further stimulus until the new year.
"Divided government looks like our future,” Sage Policy Group CEO Anirban Basu told Bisnow Wednesday. “Therefore there will be less timely and less aggressive stimulus of the economy. Also, real estate would benefit from bold, unified policymaking, and that isn't likely in the next few years at least."
Sage is an economic and policy consulting firm in Baltimore.
Political pundits and election authorities are still grappling with the ongoing counting of ballot results as a sharper focus is put on who and what voters supported. Trump did better in Tuesday’s election than polls predicted, but he is pacing behind Biden in the popular vote and the Electoral College and is firmly in thin-margin territory after key states such as Wisconsin and Michigan eluded him.
That is a reversal of how Trump won the 2016 presidential race, when his campaign managed to eke out a small number of votes in a few key states to put him over the top.
A much-predicted blue wave in Congress didn’t materialize either after Tuesday night. The Democratic Party's control of the House of Representatives doesn't seem to be at risk, though the party will lose a few seats, but its dream of capturing the Senate is unlikely as of Wednesday night, even as some races are yet to be called.
Even with a likely Biden presidency, a Republican-led Senate is “going to give him hell,” said Charles Bullock, Richard B. Russell professor of political science at the School for Public & International Affairs at the University of Georgia. A Senate controlled by Republicans, even by a thin margin, and led by Sen. Mitch McConnell could keep bills stalled in committees.
That will likely tamp down Biden's ambitious progressive campaign promises, especially giving him problems closing favored tax benefits for commercial real estate, such as the 1031 exchange, Bullock said.
“The bigger problem might be simply getting [proposed legislation] onto the floor,” he said.
So far, Republicans have shrunk the Democratic lead in the House, gaining a net six spots as of Wednesday night with 40 positions still in play, according to The New York Times. And though the Democrats have netted one additional Senate seat as of Wednesday night and four remain in play, they are expected to remain the minority party.
"The early takeaway is the uncertainty surrounding the presidency, but the Republicans are going to keep the Senate. That will lead to deadlock, whoever wins the presidency," Benefit Street Partners Managing Director and Head of Real Estate Mike Comparato said. "Deadlock is a long-term positive for commercial real estate.”
Some investors, including those in commercial real estate, see such a split as the ideal scenario, JPMorgan Chase Global Head of Equities Cayman Wills said during a Wednesday webinar hosted by Walker & Dunlop. The sector traditionally prefers stability regardless of who wins, she said, particularly when representation is nearly equal from both parties.
“A divided government that has checks and balances is going to be rewarded by the market,” Wills said. “Not having a single party in power to push its agenda is the most market-friendly outcome.”
Now that Democrats are unlikely to take the Senate, the sweeping tax reforms that were a cornerstone of Biden’s campaign but had spooked some investors are much less likely, some sources said. This also means that the impact of the election on CRE, especially if any disputes don’t linger long, will probably be minimal, sources said.
"There might be some changes, such as to the opportunity zone program, but as an industry, I believe we're going to do well during a Biden administration and a Republican Senate," Paper City Investments Managing Member Gardner Rivera said.
The New Jersey-based Paper City Investments specializes in market-rate and affordable multifamily development.
"For example, there will be redevelopment of older office buildings into residential properties," Rivera said. "The market, not the administration, will drive that. One side is red, one side is blue, but the money's always green."
The decision by voters to leave several CRE-focused issues alone for now has also been key. A number of Republican-controlled legislative chambers in various states were also thought to be in play this year, but it looks like most of them won't flip, including in battleground states for the sector like Arizona, Iowa, Michigan, Minnesota, North Carolina, Pennsylvania and Texas.
"Commercial real estate is a long-term investment, and a given outlook for the short term isn't as important as long-term stability. A divided government isn't going to change anything suddenly," Comparato said.
Benefit Street is an asset management firm with about $27B in assets under management, including commercial real estate.
"Generally, the markets [including equities and REIT stocks] are responding well," said Omar Eltorai, a market analyst at Reonomy. "The consensus is that the conclusion of the election will bring some sort of stimulus, which was held up by the election but which is very much needed."
The predictions of substantial civil upheaval also proved overblown on Tuesday. While there is still the possibility of short-term civil unrest, similar to the flare-ups this summer, all incidents thus far have been isolated and not especially violent. Even so, retailers in high-visibility urban areas, including Rodeo Drive in Los Angeles and the Mag Mile in Chicago, are preparing by boarding up plate-glass windows and taking other security measures.
"There might be a very short-term impact on commercial real estate in some of the states that are in contention, such as in Philadelphia or Detroit," Gold Gate CEO Dalton Skach said. "I believe there will be rioting and other violence in these places, especially if the election is a tie or goes to the Supreme Court."
Other market players were less sanguine Wednesday because while uncertainty with the election remains, it is now more focused on the U.S. Senate. That affects not only whether Republicans will ultimately hold a majority of seats but just how narrow that margin will be.
“The uncertainty is going to take us all the way through the fourth quarter,” said CCIM Institute Chief Economist K.C. Conway, who argues that is bad news for commercial real estate, which usually sees the last quarter of the year as the industry's busiest as deals start to wrap up. “We could actually see a fourth quarter, from commercial real estate activity, [that is] one of the slowest we've seen since 2009 and 2010."
Jarred Schenke contributed reporting to this article.