This fall’s presidential contest carries significant implications for US real estate investment, particularly considering the two final candidates’ conflicting views on taxation and housing creation.
“This is the most important election we’ve seen in the last 20 years, specifically as it relates to real estate,” says Craig Bernstein, chief investment officer at Washington, DC-based manager OPZ Capital, part of The Bernstein Companies.
As the election nears, the outcome is too close to predict, especially in a landscape radically upended by the covid-19 pandemic. Polling suggests Democrat Joe Biden maintains a modest advantage in the popular vote, but Republican incumbent Donald Trump is within striking distance in several key states that could swing a winning outcome.
“This is the most important election we’ve seen in the last 20 years, specifically as it relates to real estate”
For investors, the greatest concern going into November 3 is not that one candidate or the other emerges victorious, but rather, that neither side concedes defeat. Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System, flagged the possibility of a contested election during the pension’s September board meeting. The worry stems, primarily, from the threat of tampering, but Trump’s refusal to promise acceptance of the outcome has fueled speculation. As a result, 90 percent of real estate professionals surveyed by the law firm Morrison & Foerster in July felt he would do something other than agree a quiet transition of power in defeat.
“We saw that in 2000. It was peaceful,” Ailman says of a contested election. “Obviously, there was some excitement in Florida. But the markets managed through it because they were not looking at such extreme points of view as we are today.”
During the first debate between Trump and Biden on September 29, both candidates acknowledged that, because of an increase in voting by mail because of the pandemic, there is a strong possibility a winner will not be declared on Election Day. The former vice-president said it could take days or weeks to count paper ballots. The president said it could be months.
When asked if they would accept the outcome, Biden said he would, while Trump left open the possibility of contesting the results and raised doubts about the legitimacy of mailed-in ballots: “If it’s a fair election, I am 100 percent on board,” the incumbent said. “But if I see tens of thousands of ballots being manipulated, I can’t go along with that.”
At face value, Trump’s stance on taxation appeals more to real estate investors. The signature achievement of his first term, the 2017 Tax Cuts and Jobs Act, made temporary cuts to personal and estate taxes, and permanently slashed the corporate rate from 35 percent to 21 percent. Real estate gained from the preservation of longstanding policies on capital gains and like-kind exchanges, and only modest changes to carried interest rules. The TCJA also created the Qualified Opportunity Zone program, which has been a boon to real estate investors and developers.
Biden, on the other hand, vowed to raise taxes on individuals making more than $400,000, corporations and long-term capital gains for those earning $1 million-plus. He would also end the 1031 exchange program for real estate, which allows sellers of property to avoid paying taxes on their proceeds by rolling them into another property investment. Bernstein, whose firm focuses on tax-based strategies, says this could have a chilling effect on transactions. “If 1031 exchanges were to be eliminated, the effects would be widespread,” he tells PERE. “Not only would real estate investors need to revisit their overall investment strategy to ensure it conforms with the revised tax code, but over the long term, we would also see a significant decrease in overall investment sales transactions.”
Jeff DeBoer, head of the Real Estate Roundtable, the industry’s top advocacy group, tells PERE that while Biden’s plan to use tax increases to finance social programs is “well intentioned,” it would be an area of concern if he were elected. He says: “We look forward to having that debate.”
Not everyone in the industry is as concerned about a Biden administration. In early August, Barry Sternlicht, chief executive of Miami Beach-based Starwood Capital, told investors that the former vice-president’s proposals to end 1031 exchanges would have minimal impact on his firm. “It isn’t required. It isn’t helpful and it’s unique to real estate,” he said. “That’s an easy loophole for them to fill. I’ve never used it in my life, by the way, so I have never been affected.”
Biden is likely to find more industry support for his plan to address affordable housing, which calls for spending $640 billion over 10 years to grow the national housing stock. This includes providing support to rent-burdened tenants, expanding the Low-Income Housing Tax Credit, a critical financing component for affordable housing investors, and giving direct assistance to first-time home buyers.
Trump, despite his storied career in the real estate industry, does not have a formal plan for housing. This summer, he said policies aimed at increasing multifamily development in low-density areas would “destroy the suburbs,” which is out of step with the industry’s effort to remove barriers to new housing development.
“If we want a more equal-opportunity world and society, we can’t be opposed to these kinds of things,” DeBoer says. “It’s all about having the opportunity to educate yourself and be exposed to every opportunity that everyone else is. If you can’t live in certain areas, you don’t get that. So, I did not find [the president’s] comments or actions on this front appropriate.”
While private real estate professionals have made individual contributions to each campaign, the industry’s senior leaders have, by and large, remained on the sidelines this election cycle. One noteworthy exception is Blackstone chief executive Stephen Schwarzman, who donated $355,000 to the Trump Victory Fund this election cycle, according to online filings with the Federal Election Commission. Overall, he has spent $3.9 million backing Republican candidates.
Blackstone chief operating officer Jonathan Gray, on the other hand, has donated more than $1.1 million to Democrat political action committees. However, he has avoided candidates at the top of ticket, aside from a $2,800 donation to the short-lived campaign of former Colorado governor John Hickenlooper, a moderate Democrat.
“In any election cycle people are going to look at their overall investment strategy and business strategy, and they’re especially doing so today because of everything else that’s going on”
Related Companies chairman Stephen Ross, an active donor who drew criticism for his friendship with Trump, skirted the presidential contest too. His donations total almost $200,000 to candidates and PACs from both parties, according to the FEC, though the lion’s share has gone to Republicans.
Firms that run their own PACs have taken a similar tack, donating to both sides. The Carlyle Group, for example, has raised nearly $430,000 this cycle, according to the non-partisan Center for Responsive Politics, distributing $46,000 to Democrats and $17,500 to Republicans running for the House of Representatives.
The Real Estate Roundtable also spends its own PAC money on a bipartisan basis. DeBoer says an ideal outcome for this election would be a continued divided government. “Just like in a business, university or any type of governing structure, if everybody has the same opinion, it might not be as well informed as it could be,” he tells PERE. “If you can get things done in a divided government, the policies tend to be more sustainable over time.”
While the long-term implications of the election remain to be seen, market participants can expect a slowdown in the weeks ahead as they wait for the fallout.
Lisa Knee, a head of the national private equity real estate group at accounting firm EisnerAmper, says sales activity always hits a lull ahead of presidential elections. She says this year is likely to be worse because of the disruption brought on by the pandemic. “In any election cycle people are going to look at their overall investment strategy and business strategy, and they’re especially doing so today because of everything else that’s going on,” she says. “People are looking at their back of house and making sure they have a disaster recovery plan in place with the infrastructure to execute it.”
In his address to the CalSTRS board, Ailman said he expects volatility to pick up by mid-October, especially in the public equities markets. Overall, the pension will adopt a “defensive” approach while continuing to take advantage of opportunities created by monetary policy.
“These markets are at all-time highs, mostly due to the Federal Reserve and this put [option] they’ve almost put on the market,” he said. “It will be challenging, and we will have longer discussions with the committee … and then a lot of communication with you in October.”