Cautious Optimism Rules as Brokers Eye the Biden Years

It’s official. After an election season fraught with drama, the Democrats have the keys to the White House, and its prime resident, Joseph Robinette Biden, Jr., is settling into his new raft of duties. It’s early enough in the Biden presidency, however, that concerning the future direction of the country, “everyone can be an expert,” as Arlon Brown, SIOR, recently put it.

And he’s right. So early in the fledgling presidency, we have little more than speculation on specifically how the coming years will impact commercial real estate.

As the new year dawned, clarity over our political future was a tricky proposition. But now, a new administration and an almost evenly split Congress are in place and so—we can hope—peace may at last descend over the land.

But the speculation remains over how the next four years will shape up. And things may change rapidly, as a flurry of presidential executive orders already streams from the White House, which will set the tone inside the Beltway and usher in some clarity. We also have history, from which we can draw assumptions, as well as an industry that’s by nature optimistic. So, while there are some areas of concern, the news ain’t all bad. Let’s start with the history (and for the record, we’re focusing here only on those issues that would impact commercial real estate).

A recent report from Cushman & Wakefield points to solid performance for commercial real estate in the years ahead. That’s not a political bias but the result of research showing that, no matter which party occupies the White House, this industry has always performed well.

“Overall, commercial real estate over the 40 years that I’ve been involved has done very well, regardless of who’s president,” says Brown, senior advisor for SVN | Parsons Commercial Group in Boston.

But history also shows a Democratic tendency toward bigger government, something that might burden tax rates but actually bodes well for our industry. Growth in government means growth in its real estate holdings. “Without a doubt it’s a good thing,” says Brown. “They’ll need more office space to house people—especially with COVID—and they might even give more square footage per person. I can see the need for more warehousing.”

Possibly. But there’s still the Trump-era overhang of shrinking regulation, much of which resulted in vacating government offices. “There’s been a lot of shuffling and reduction of government lately,” counters John Steinbauer, SIOR, president of Miami-based Steinbauer Associates, Inc. “I’ve seen a number of buildings that are being put on the market by the government, so they may stop that and refill what they already have.”

But again, we’re left with little but speculation, and for Steinbauer, so much of the election was taken up with COVID that a deeper dive into policies that could impact commercial real estate were given only cursory treatment. “The election for me wasn’t based on what anyone was going to do,” he says, “other than how we’re going to fight the virus. Finding information about things that would affect our business was hard.”

We’re already starting to see some of the Trump-era policies being rolled back. How many more is the question. Recognizing the positive impact of some of these on business, Steinbauer hopes “the new administration would keep some of those things.”

One surviving initiative could be the push for infrastructure improvement, touted by both Trump and Biden as necessary to commerce and the overall health of the nation. But this too could end up being a double-edged sword. It’s the influx of capital that has Kurt Stout, SIOR, worried. An executive vice president at the Washington, DC office of Colliers International, Stout leads a team that handles government-building transactions (mostly leases). Again, history rears its head.

“Prior to 2020, two of the biggest stimulus events of the past 15 years were BRAC (the Base Realignment & Closure Act) in 2005, and the American Recovery and Reinvestment Act of 2009,” he states. In both, billions were allocated to federal building construction and renovation projects. As a result, Stout says that some six million square feet of federal leased space was siphoned into fed-owned buildings, a serious blow to private-sector landlords.

If certain initiatives remain from the Trump administration, 1031 like-kind exchanges and capital gains—at least in their current form—aren’t likely to be among them. The new administration has promised to revisit both, with a potential increase in the capital gains tax rate and a limit or repeal of 1031s. These will come in addition to a promised limitation of tax deductions for people earning more than $400,000 annually.

“People have to be careful not to make over $400,000 because they’ll face a tax increase,” says Steinbauer, who adds, tongue-in-cheek: “So, don’t make too much money.”

“If 1031s are abolished,” says Stout, “it would certainly slow transaction volume across the board.” He explains that, in the federal sector, small investors will be hurt most since they gravitate toward smaller deals, which actually make up the bulk of federal facilities. For large-asset plays, “We’ve seen a tremendous aggregation of institutional ownership. It’s the smaller properties that attract the private capital investments that are driven in large part by 1031s.”

The disappearance or severe alteration of 1031s will make these investments less attractive. “It will provide more incentive for owners to hold these properties and create more stagnation in federal-sector real estate,” he says.

“I don’t think it will come out unscathed,” says Brown of the 1031s. “But who knows what they’ll think of? And whatever one side comes up with, the other side will want to monkey with it.”

Environmental controls, always a sore spot and a political football, may also raise some concern. Industrial brokers in particular are worried about the potential collateral damage of such controls. “One of the areas that might affect our business is a gas tax to drive more use of alternative fuel sources,” Steinbauer says, adding that it would “certainly impact the economy and our business.”

What’s more, he says, “The push has been for more manufacturing coming back to the US. But if the environmental controls are too tight, it will be a tough thing for someone to move a factory to an area without going through all sorts of environmental controls. From a business standpoint, that can slow down velocity.”

“People in real estate are generally rational optimists,” says Stout, “and I’m one of them. After COVID vaccines are fully administered, there’s only one way to go, and that's up.”  He adds that, while the economic recovery that should sprout from a healthier population might still be a ways off, “It’s going to be pretty robust. If there's concern about what’ll happen in the next four or eight years, it’ll have less to do with the party in power than the lessons we learned during the pandemic about remote work.” (He adds that, as work-from-home has proven itself effective, he finds flaws in it, especially as it impacts team-cohesion and knowledge transference.)

While aspects of sustainability raise concern, they also speak to growth. For instance, we’re now back in the Paris Agreement, and we should expect the reinstatement of “many of the energy-efficiency goals that were implemented during the Obama Administration, when [Biden] was vice president,” says Stout. That, he says will create incentives, not only for federal buildings, but also “straight across the board.”

With the assumption that a COVID vaccine will be widely dispersed and effective, we once again see the world opening up to business and business travel. That, in turn, “will help us bring in investors who’ve been waiting to come back to the US,” says Steinbauer. It will also give a much-needed boost to international logistics. “Truck drivers will be able to move more goods and more frequently, so the business itself should improve.”

Of course, as of this writing, Biden is still unpacking boxes in the Oval Office, rendering most of this as speculation. What we do have in these weeks just after the official swearing in is what we’ve always had as an industry and a community: A track record of strong performance, regardless of the party in power, and an endless supply of cautious optimism.

CONTRIBUTING MEMBERS

Arlon Brown, SIOR

John Steinbauer, SIOR

Kurt Stout, SIOR