While national politics always seem to dominate the TV screens, and issues like interest rates and inflation can help determine overall market trends, SIORs say that some of the most impactful politics occur closer to home.
“A couple of common political issues affecting the market in major ways are changes to zoning laws, incentives, and taxes—both income and property,” notes Duane Poppe, SIOR, managing principal with Lee & Associates | Twin Cities in Minneapolis. “Additions or changes in zoning laws may restrict or open development and business opportunities. New incentives to attract and retain companies to their region may be of importance if growth in business development is within the elected official’s agenda. Changes in property taxes have a heavy influence on a company’s decision to relocate or grow in their current market.” Poppe notes that he often sees companies choosing to relocate to another market or state depending on the local or state property tax rates.
What does he see currently in his market? “It is expected that businesses will have increased expenses in safe and sick time leave, and there is also the concern of an increase in payroll tax,” says Poppe. “These additional expenses will impact a company’s bottom line. which may lead them to seek other locations and evaluate controllable expenses.”
Changes in rules and regulations on zoning, Poppe adds, are expected with the legalization of marijuana in Minnesota. “This will have an impact on both industrial and retail real estate,” Poppe asserts. “As we have seen in other markets around the country, new real estate opportunities may come as a result of companies seeking to set up growing facilities and dispensaries.”
Landon Williams, SIOR, senior vice president, capital markets with Cushman & Wakefield in Memphis, Tenn., notes that at the local level, “an election can affect a variety of issues in CRE such as a candidate’s plan to handle crime, the perspective on zoning issues and general city planning, as well as their position on corporate incentives to retain existing businesses and attract new ones to the area.” At a federal level, he adds, the 1031 exchange is almost always re-evaluated. “Additionally, a candidate’s plan for infrastructure spending can impact commercial real estate as well as certain tax laws, i.e., tax laws associated with depreciation.”
That is our job; as a trusted advisor of commercial real estate to our clients, to understand where the puck is going and advise them to that solution.
Local politics is also playing an important role in Highland Park, Ill., where David Liebman, SIOR, is founder and designated managing broker of PowerPlay Real Estate Partners™. “We have one right here on the ballot in the city of Chicago in a March referendum about increasing the transfer tax on real estate in the city,” he shares. This “hotly contested issue,” boosted by the Mayor as a way to help resolve the immigrant overflow problem, would tax transfers over $1 million and “puts a real restriction on commercial real estate developers who want to do deals,” says Liebman, who asserts it could quadruple that tax on some sales. Naturally, he adds, commercial real estate professionals have been lobbying against the legislation, and he believes it’s “doomed from the start.”
“City elections are critical, as cities across the board are dealing with crime and homelessness,” adds Nora Hogan, SIOR, principal with Transwestern Real Estate in Dallas. “Unless officials are elected [who are] willing to be tough on crime, the cities will continue to deteriorate, and real estate values will decline,” she says. “The consumer will have ‘less friendly shopping experiences,’ with items locked in cabinets, less impulse buying and profit margins for retailers shrinking, hence we may see more stores closing.”
Eliminating parking minimums, Hogan continues, is currently a big topic. “The minimum parking ratios have had a negative economic impact on urban locations,” she asserts. “Surface parking at $10,000 per space is not an option for high-rise urban development; spending $50,000 per garage space including land costs can drive up the overall project cost by 25% or more.”
However, she adds, eliminating the minimum parking requirement can backfire as consumers spend “endless hours” circling the block trying to find a parking space.
“We have come full circle in Dallas,” she shares. “For years uptown could not lease space because when the office buildings were originally built, they had low parking ratios when high density was the trend. Now that the area has been ‘reborn’ as the new cool district with residential density exploding and walkability is key, there is not enough parking and renters are surprised to learn that in addition to their rent, a garage parking space will cost them $250 per month.” Still, she adds: “Policy implementation takes time; therefore, for the most part 2024 is already done and in a holding pattern.”
Perhaps none of the SIORs contacted has as much personally invested in local politics as Jim Baker, SIOR, with Baker Commercial Real Estate in Clarksville, Ind.; he is running for State Senator. One of the primary reasons he’s running, he explains, is to support private property rights which he says are being “infringed on by an overreach of government and ‘NIMBY’s.’” Baker, who also has an appraisal license, says the first thing an appraiser, investor, or broker should look at is the highest and best use of a property. “Unfortunately, that is not what local municipalities, or the state necessarily rule in favor of,” he declares. Protecting and preserving property rights, he asserts, “will be my advocacy.”
DEALING WITH UNCERTAINTY
SIORs know that clients don't like uncertainty—and election years are nothing if not uncertain. How are they advising clients this election year? “Uncertainty results in many clients holding off from making decisions until after the elections. Advising clients in an election year, characterized by uncertainty, involves developing solutions that align with their overall business strategy,” says Poppe. “Providing solutions to account for various election results is a combination of risk management, strategic planning, and a focus on long-term fundamentals of the real estate. As I help my clients with strategies, I also have found it critical for my business to keep up with current legislation. In addition, speaking with state representatives of upcoming legislation provides a deeper understanding, which allows me to articulate potential impacts to my client’s business.”
“There is a lot of uncertainty” concerning, for example, the inflation rate, adds Liebman. So, how is he advising clients? “Typically, I say to clients, ‘Look at it in the immediate near-term; what is your ultimate goal?” he shares. “If you find the terms of the deal acceptable, make the deal—because the future is always unknown. Don’t try to time the market; do the deal when the time is right.”
“Be prudent,” adds Hogan. “It is not only the election, but also the question of how AI will impact business, the uncertainty of the world governments, and understanding we are one germ away from another pandemic. Whereas companies used to be able to confidently do a five-year strategic plan and optimistically a 10-year plan, today it is more difficult.”
Companies, she continues, need to make tough decisions as to how best serve their customers while protecting their bottom line, for the “just in case” moment. “Ask the companies who make up the 233 million square feet of sublease space as of the end of 2023 if they wish they had been more conservative, or 23andMe, that went from a $6 billion dollar valuation to a penny stock,” Hogan challenges. “Profits matter regardless of an election year.
Baker, however, does not let any national uncertainty affect his outlook or how he runs his business. “The economy of the Indiana and Louisville MSA is very strong, and the big reason we are not much affected by the national political scene is logistics—think rivers, rails, roads, and runways; we’re strong in all four categories,” he states. “Because of that, we’ve never been as susceptible to ups and downs as the coasts.”
CALMER HEADS PREVAILING
Despite the acknowledged uncertainty, SIORs agree that in terms of their own business strategies, what’s most important is to remember who you are, learn from lessons of the past—and perhaps most important of all, don’t be swayed by the temporary winds of political change.
Guessing implies risk, and to some extent, there will always be some risk, but information can really help to reduce that risk.
“Having strategies developed to prepare for either side of an election has provided minimal disturbance to my business,” says Poppe. “It's essential to monitor election outcomes, understand proposed policies and their subsequent legislative actions to help better predict specific impacts on the commercial real estate markets. I have learned in these times it is critical to stay in close communication with your clients, give them regular updates, and proactively address their concerns.”
“As Wayne Gretzky said, ‘I skate to where the puck is going to be, not where it has been,’” Poppe continues. “That is our job; as a trusted advisor of commercial real estate to our clients, to understand where the puck is going and advise them to that solution.”
“As a CRE investment advisor, it is important to gather the information about potential regulations that could impact the CRE market, as well as what other key players are doing in the market, and distribute that information to help investors and users of real estate make informed decisions,” adds Williams. “Guessing implies risk, and to some extent, there will always be some risk, but information can really help to reduce that risk.”
“I learned a valuable lesson in 1989,” Hogan recalls. “I was relatively new in the business, the office market was not good, and George Bush (Republican, 1988) and Bill Clinton (Democratic, 1992) could not pull the economy out of the abyss. The Resolution Trust Corporation was formed to save our banking system; by 1996 the economy turnaround was in full force. Remarkably, I was in the top ten repeatedly in those RTC years for my company while I watched my colleagues, who did not want to work ‘small insignificant transactions,’ lose their houses in foreclosure. The lesson I learned is: if a client has a need, and you can help them, help them! Don’t worry about the paid day; you will be paid very well over the years as it all adds up.”
Liebman, apparently, has also learned a valuable lesson: basing your strategy on political expectations is not the best strategy. “Frankly, if I start looking at what elections will or will not provide, I will not only be second-guessed about who will be elected, but about what they will or will not do,” says Liebman. “Whatever they say on the campaign trail means nothing once they get elected; they can go completely 180, and just couch things in different terms. Facts don’t matter anymore.”
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