Coming into this week’s US federal elections, a disputed presidential contest was among the top concerns for institutional real estate. With thin margins in several key swing states and a clear victor yet to emerge, that concern may yet prove to be justified. But the reality will not be so dire for the sector.
In fact, even as vote counting continued and the Trump campaign fired off a series of legal challenges to contest the outcome in certain states, a sense of calm was settling over the real estate industry this week. The reason for this serenity was the outcome of down-ballot congressional races. By Wednesday morning, Republicans were poised to retain control of the Senate and gain seats in the House, ruling out a so-called ‘blue wave’ of Democratic victories.
With a divided Congress, the occupant of the White House matters little to real estate investors. Historically, federal politics have had a minimal impact on the industry – state and local laws are far more impactful. But this cycle has been different, given the spate of tax reforms and regulations championed by the Democratic platform. Ahead of the vote, opinion polls projected a landslide victory for Joe Biden and a nearly clean sweep for his party, an outcome that would undoubtedly have hampered private real estate market activity. Instead, it is regulatory gridlocks that are now beyond doubt. The status quo will reign.
At the institutional level, this means the capital gains tax rate and carried interest loophole will be untouched. Like-kind exchanges will remain intact, too. A divided government is also unlikely to alter the Qualified Opportunity Zones program, which has become a favorite for managers large and small since its creation in 2017. Moreover, a corporate tax hike from 21 percent to 28 percent is almost certainly off the table and, with that, concerns about a stifled economic recovery post-covid.
A protracted legal battle for the presidency would certainly have its consequences, though. The longer it carries on, the more likely it will be to cause volatility and disrupt asset prices. Yet with transactions largely on hold anyway because of the pandemic, the net effect will be minor. In the longer run, prolonged accusations of cheating could erode confidence in US democracy. But that, too, would be mitigated by the country’s long track record as a haven for global capital.
The most urgent side effect of a drawn-out contest would be delays to government stimulus. Already stymied by partisanship, it is hard to imagine a White House challenging election results in multiple states and negotiating with House Democrats simultaneously. If businesses are closed and workers unemployed, that hurts landlords, especially in big cities. But a decisive victory for either presidential candidate might have yielded the same result.
Ultimately, real estate is a long-term asset class, one that tends to perform well under both parties. As such, it will always favor the outcome that leads to the least amount of change. It will leave 2020 intact, regardless of who resides at 1600 Pennsylvania Avenue come January.
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