As the U.S. heads into the final months of what many consider to be the
most polarizing and consequential presidential election in generations,
what will be the impact on real estate capital markets?
Historically, the overall economy is relatively unaffected during an election year. According to a 2024 report by Wells Fargo that examined the 18 presidential U.S. election years between 1948 and 2016, researchers debunked the notion that election uncertainty causes individuals and businesses to delay large purchases or investments during an election year, leading to a slowdown in economic growth. Instead, growth rates of GDP, consumer spending, and business investment spending were slightly higher during presidential election years than non-election years – with no evidence of increased government spending designed to boost the chances of an incumbent. The report further predicts that the election will not materially affect the U.S. economy in 2024.
“Capital markets behave no differently in an election year than in any other year,” asserts Gabriel Silverstein, SIOR, managing director of SVN | Angelic in Austin, Texas, and SVN Institutional Capital Markets chair. If they think we're in a recession, they behave like we're in a recession. If they think we're in an expansion, they behave like we're in an expansion, and if they think it's uncertain…they cross their arms and do nothing.”
Nevertheless, Silverstein expects that 2024 will be the “craziest election cycle that we've ever experienced” and has concerns that, as we enter the summer months, things like polling, news stories about the candidates, or court case results may influence the markets to try to “play two steps ahead and behave as if the election has already happened—even though it may still be six months before the actual inauguration.”
During an election year, institutional investment advisors typically advise their clients to resist the temptation to mix political ideology with their portfolios, as emotional decisions are generally not sound investment strategies. In an article penned before the 2022 midterm elections penned before the 2022 midterm elections, Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, reminded clients that “long-term financial success is not based on whether the candidate or party that most closely aligns with your political viewpoints wins an election. In turn, your financial goals should not change based on which party controls the levers of power in Washington.”
To illustrate, he pointed to the diametrically opposed energy policies of the Trump and Biden administrations. While Trump eased regulations on the fossil fuel industry that should have translated into greater profitability for the companies, oil prices declined during the COVID-19 shutdown due to the lack of demand. And while the Biden administration’s energy policy favors alternative energy investments, oil prices and profits for the industry skyrocketed in 2022 and 2023 due to increased demand and Russia’s invasion of Ukraine.
While the lion’s share of attention is focused on who will win the presidency, Silverstein says that the makeup of the Congress—who controls the Senate and House of Representatives—can also significantly impact capital markets. “If you have a president that's red, you want the House or Senate to be blue and vice versa. Because when you have the presidency and both congressional houses from the same party, spending gets bigger, debt balloons, and the cost of debt probably goes up because there's so much more federal debt,” he states. “Gridlock is actually what markets tend to prefer.”
Gary Ralston, SIOR, managing partner with SVN/Saunders Ralston Dantzler Real Estate in Lakeland, Fla., agrees. “One of the good things is that in election years, you rarely have new taxes,” says Ralston. “The lack of continuity and connection across the aisle means that not a whole lot is accomplished. That's both good and bad, but historically, you're not borrowing as much as with a unified Congress and presidency.”
“From the CRE investor's mindset, it feels like the uncertainty is related to the broader economic issues than to the presidential election at this point.
INVESTORS NOT FOCUSED ON ELECTION (YET)
Despite the relentless media attention on the election, Landon Williams, SIOR, SVP for Cushman & Wakefield in Memphis, Tenn., says that in his daily conversations with investors and lenders, there had been little talk of the impact of the election on capital markets early in the New Year. The focus instead has been on the uncertainty in the market—mainly when the Fed will cut interest rates and whether underwriting standards will ease. “There is this feeling of uncertainty,” says Williams. “On one hand, we have a desert of investment opportunities for commercial real estate right now, and on the other, we have a historically high amount of dry powder earmarked for commercial real estate. I think investors are looking at the underwriting, their need to deploy capital, and the lack of opportunity to do so, and I think that is weighing more heavily on their minds than what they're thinking about the election and what the outcome will be.”
UNCERTAINTY CAN CREATE OPPORTUNITY
Despite the capital markets' slow start in 2024, Ralston believes the degree of volatility associated with the election may create opportunities for savvy real estate practitioners who understand market movements and idiosyncrasies. “I think we are going to have adequate opportunities on the transaction side of the business this year, and astute investors will also do well this year.”
Williams agrees that the volatility in the market is creating opportunities, especially for more sophisticated investors who are now evaluating properties that don’t typically draw a lot of investor interest in an upmarket. “What we’re seeing in our office is that any property that comes on the market is getting an unprecedented amount of attention, and [not just those] with a driving force like a loan maturity,” says Williams.
PROVIDING GUIDANCE IN AN UNCERTAIN MARKET
In an uncertain market, what kind of guidance are brokers providing for their clients in this election year?
Silverstein says one of the primary responsibilities of a broker is to help their clients mitigate risk. “One of the risks that specifically relates to the presidential election cycle is the risk that in the second half of this year—regardless of what the economy does or what interest rates do—there is a very real risk that things slow down because of uncertainty,” he says. “Corporations might not sign as many leases because they want to ‘wait and see’ what happens in the presidential election.”
Silverstein would advise brokers on the owner side to help their clients mitigate risk by being more flexible in negotiations. “If you represent a landlord and they get a deal that maybe isn't quite as good as they really want, but they've got some vacancy or some rollover exposure, I think they should seriously think about being a little more flexible right now,” says Silverstein. “Get those deals done to get past the end of this year or next year so they have some protection in case it does get soft. That is directly related to the presidential election cycle and the uncertainty it creates.”
On the capital markets side of the equation, Silverstein says that institutional and private investors behave very differently in times of market uncertainty. “Private investors love market timing—buy on the dip, sell when it’s high,” he asserts. “Institutional investors are very different. What investment funds try to do is to be good operators, make good buy decisions, and time their sells correctly in the operational cycle of the property, more than that of the market.” He says that private investors see the current market as a good time to buy, and even if valuations continue to (temporarily) decline, they should be in a good position as the market improves. And although he expects interest rates to come down over the course of the year, he has concerns about whether loan-to-value ratios will follow suit as banks struggle with their CRE portfolios. “I think that even if you see lower interest rates at the treasury level at some point, you may not be able to get the loan amount you need at the lower interest rate, and (lower interest rates) don't help if you can't get a loan.”
MARKET UNCERTAINTY OVERWEIGHS ELECTION
Although the U.S. election looms large in the eyes of the media and, by extension, the American public, it has had little effect on the capital markets in the first half of 2024. “From the CRE investor's mindset, it feels like the uncertainty is related to the broader economic issues than to the presidential election at this point,” says Williams. As a result, investors are taking a more conservative approach, with low-vacancy assets like industrial and grocery-anchored shopping centers seen as safer bets. And lenders are “underwriting to even more conservative standards than I've ever seen in my career,” says Landon. “I acknowledge that there is a psychological component depending on how you feel about the candidates, but there is still basic math that has to be done to underwrite a deal that will come into play—regardless of who wins the election.”
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