With a new president in the White House, many people are wondering how a new administration will impact commercial real estate. While which political party is in power doesn't necessarily shift real estate cycles, there are some ways that various legislation and regulatory decisions can impact the market as a whole.
Right now the residential real estate market and the commercial real estate landscape are in very different places. Existing home sales in 2020 skyrocketed up to a number not seen since 2006. New home sales were similarly robust, up over 18% in 2020. However. commercial real estate went in the opposite direction. According to 2020 year-end data from Real Capital Analytics, U.S. sales volume fell 32%.
Residential real estate is expected to have a similarly strong 2021 at least for the first half of the year. Inventory remains low as prices rise. On the commercial real estate side, many analysts are anticipating that distressed assets, especially hotels, will hit the market this year. While 2020 should bring a recovery in some areas, there is clearly a long road ahead and legislation at the federal level could have an impact on how various sectors bounce back.
The lending environment and social programs
With Janet Yellen as the Secretary of the Treasury and Jerome Powell running the Fed, it's likely interest rates may stay low as the economy recovers. Low interest rates have kept the housing market strong even as median prices hit record highs. However, even as rates remain low, underwriting has become increasingly tight. On the commercial side, lenders have been even more strict, especially when it comes to new development projects in the retail or hospitality space.
It's likely the Biden administration will put more focus on housing, including incentives for building. This could become part of the next stimulus package, which Biden is expected to reveal in February. President Biden's commitment to affordable housing could include an expansion of the budget for Housing and Urban Development as well more tax credits for providing housing.
Two rounds of stimulus have helped save businesses and keep families afloat, but it could be too much of a good thing if it's propping up a weakened economy. "If the Democratic party starts to implement policies that place more liability and financial burden on business owners, the commercial real estate market will continue to suffer," says Marina Vaamonde, Founder of PropertyCashin.com "Stimulus packages are good in the short term, but they won’t be enough to bring back the booming economy anytime soon."
Are 1031 exchanges going anywhere?
As we discussed in a recent Millionacres podcast, the 1031 exchange is a very valuable tool for real estate investors. It allows an investor to sell one investment property and purchase another without paying capital gains taxes. However, there are concerns that the Biden administration is considering removing or scaling back the 1031 exchange program.
"I think a lot of CRE executives are very carefully watching the current administration's potential plans that may radically augment or rollback Section 1031 of the U.S. Internal Revenue Code," said Dennis Cisterna, Chief Investment Officer at Sentinel Net Lease. Regardless of who is in office, the 1031 exchange has been a fundamental tool of wealth creation for millions of Americans and any change to like-kind exchanges has the potential to seriously disrupt CRE market fundamentals across the board."
A serious look at climate change
The Biden administration has already made several moves on the climate-change front, including bringing the U.S. back into the Paris Climate Agreement and shutting down work on the Keystone XL pipeline.
"Incentives to improve the energy efficiency of existing buildings will help large real estate owners and operators, reduce greenhouse gas emissions, upscale assets, and lower operating expenses," added Frank Sullivan, Chief Business Development Officer at BrainBox AI. "Deep retrofits are the traditional way to attack this problem, yet scale and impact are typically only achieved over a long horizon and provide modest gains. There is an emerging category of solutions, many of which are driven by artificial intelligence, that in parallel can deliver dramatically increased carbon reduction and energy usage in the built environment."
New York City already has an energy assessment program in place. Other cities are starting to look at commercial real estate and climate change. During the pandemic, building owners began to rely more on data and modeling, like digital twins, to assess performance.
The Millionacres bottom line
In general, the commercial real estate market is driven more by economic cycles than by which political party is in office. The current economic situation may mean the government will be more likely to provide incentives to support small businesses as well as multifamily development.