How the 2016 Presidential Election Will Effect Real Estate Financing
Nov 11, 2016
The 2016 Presidential election has been full of surprises and unexpected revelations. "Unexpected" is the key word of this election with the introduction of an increasing number of unsettled elements furthering an air of uncertainty. Election years do generally create some uncertainty in the business world which can translate into the postponement of large-scale decisions. While this generally can translate into a reduction in business activity, it has not yet been evident in the activity data for the commercial real estate market.
Both Candidates Have More Common Ground Than You Think
Although this election has been incredibly contentious, it features two candidates that have more in common, in terms of their business outlook, than the increasing polarity of their political rhetoric suggests. Both candidates have been supportive of the current Federal Reserve chairwoman Janet Yellen, who has been pursuing a low-interest rate policy. Keeping interest rates low will continue to keep the cost of commercial real estate financing low. Both candidates also support infrastructure spending as a way to kick-start U.S. economic growth. Enhancing the nation's ports, bridges, roads, and power lines would be generally supportive of the economy; adding jobs and increasing the efficiency of the current infrastructure. Any efforts to ease congestion and bolster employment should generally be supportive of the real estate market and consequently commercial real estate which is highly correlated with residential real estate.
Differing Opinions on Business Tax Policies
Trump and Clinton do significantly differ in their tax proposals. Trump's tax proposal includes a 15% corporate tax rate which is a significant decrease from today's nominal rate of 39.1%. This broad-based cut in business taxes would most likely stimulate economic activity and consequently the commercial real estate market as businesses expand. Hillary Clinton's tax proposal includes more specific business incentives. Her tax proposal would offer benefits for companies that share profits with their workers or establish apprenticeship programs. While President Obama has previously supposed cutting corporate tax rates, Hillary Clinton has not addressed this topic specifically. She does propose to discourage U.S. based companies from moving overseas by imposing tougher restrictions if they do. Keeping jobs within the United States would also have a positive net impact on the commercial real estate prices.
Election History: Sense of Uncertainty Slows Real Estate Price Increases
With both candidates offering proposals that would support business and consequently real estate prices, it is perhaps counterintuitive that numerous studies show that real estate prices in general increase at a slower rate in election years. One possible explanation for this is the general sense of uncertainty that presidential elections bring about. Departing two-term presidents, in particular, create a leadership void that can slow financial activity.
Why Some Uncertainty May Continue After Election
In this election we have a choice between two candidates that have very different backgrounds. Donald Trump's lack of political experience makes it more difficult to predict how he would interact with the Senate, Congress, and various other elements of the U.S. government. On the other hand, our Democratic nominee has been the subject of an FBI investigation into her use of a private email server. The possibility of formal indictment during her term in office has been the cause of wide-spread speculation. Neither of these uncertainties will be resolved as a consequence of the election so we may continue to feel the effects of the 2016 Presidential election on economic activity well into the first part of 2017.
Commercial Real Estate Outlook After the 2016 Election
Regardless of the election result there are commercial real estate market factors that support an optimistic outlook. Staying focused on the bigger picture and the longer-term perspective offers an antidote for the short-term volatility and worrying reflected on both sides of the aisle. The Federal Reserve's commitment to a low interest policy has been advantageous for commercial real estate financing. Even if there is a small rate hike in December, the low rates will continue throughout 2017, setting the stage for continued activity in the commercial real estate sector.