Despite campaign promises to change the tax code in ways that would hamper private real estate, Joe Biden’s upcoming inauguration is not provoking fear within the industry.
Indeed, if the sector’s investors and managers are sanguine on January 20, 2021, it will be because the 46th US president will not have the backing of a unified government ready to implement his platform, but rather a divided Congress poised to produce little substantive change.
“I’ve even heard it described as the Goldilocks result,” Todd Henderson, head of real estate for the Americas for German manager DWS, told PERE. “You get, basically, a continuation of gridlock in congress and the markets generally like that.”
A projected Democratic sweep of the White House, Senate and House of Representatives raised fears that a barrage of tax hikes – on personal income, capital gains, carried interest and corporations – and confining environmental regulations would be rushed into law.
While it took several days to call the presidential contest for Biden, early results showed there would be no ‘blue wave.’ Democrats lost seats in the House and saw hopes of taking control of the upper chamber wither. A pair of run-off elections in Georgia in early January could still tilt the Senate in their favor by the slimmest of margins – a 50-50 tie with Vice-President-elect Kamala Harris holding the deciding vote – but even that narrow divide would make sweeping changes unlikely.
“This election had the potential for having a greater impact than what we normally see in federal elections,” Henderson said. “With what appears to be the Republicans controlling the senate, the Democrats losing seats in the House… that moves more toward centrist governing, which is positive for the economy and anything positive for the economy is positive for the real estate environment.”
Yet Biden’s administration will not be powerless to affect change. The president and his cabinet have discretion over what rules are enforced and how. On Donald Trump’s watch, for example, the Securities and Exchange Commission relaxed rules on retail investment in private funds. It is unclear how a Biden administration would handle this.
One mandate that is nearly certain to see the chopping block is a Labor Department regulation requiring public pensions to prove that investments emphasizing the environment, social justice and/or governance present financial benefits beyond those without an ESG focus before committing funds. Biden has made emissions reduction a centerpiece of his policy plans but has pledged to work with the private sector on the issue.
Cut both ways
During a November 10 conference hosted by Bank of America, Blackstone president and chief operating officer Jonathan Gray acknowledged that Biden’s plan to combat climate change could cut both ways for the firm. Stiffer regulations will likely be a hindrance. But a focus on green energy plays into the firm’s infrastructure and renewable energy positions, as well its commitment to slash emissions by 15 percent at newly acquired properties.
“I don’t expect dramatic changes overall just given the split nature of government,” Gray said. “But regardless of what comes, we feel good that we’ll be able to navigate that.”
Similarly, Biden’s emphasis on healthcare and combatting covid-19 are expected to benefit real estate strategies focused on medical office, life science lab space and senior housing. “As we’re facing a Biden presidency, who’s very committed to healthcare and leaving no seniors behind, now we think our senior living portfolio is worth more than it was a week ago,” Colony Capital chief executive Marc Ganzi said during his keynote interview for our PERE America conference on November 10. “Certainly, our skilled nursing portfolio is worth more than it was a week ago.”
Even if Biden and the Democrats succeed in raising the corporate tax rate from 21 percent to 28 percent, the net impact could boost listed real estate, Bernhard Krieg, a managing director and portfolio manager for Brookfield’s real estate securities team, told PERE, pointing to the tax-exempt nature of real estate investment trusts. “REITs wouldn’t necessarily see a benefit. But it’s more of a headwind for other equity investments, so that’s incrementally better for REITs,” he said.
In total, Biden’s willingness to increase government spending and broaden public-private partnerships to stimulate an economic recovery is expected to roughly cancel out his ambitions to raise taxes and enhance regulations – particularly when taken in the context of a gridlocked legislature.
One area where private real estate executives hope the incoming president will surpass the current one, however, is market stability. Regardless of its efficacy, President Trump’s nature, widely considered mercurial, was thought to have contributed to volatility at home and abroad. His protectionist and isolationist rhetoric was also thought to have made US assets less appealing to global capital. Before Trump’s election, 2015 and 2016 saw nearly $100 billion of net acquisitions from foreign buyers, according to Real Capital Analytics. Cross-border activity has fluctuated since 2017, with net acquisitions totaling less than $60 billion during that time – international groups were net sellers in 2019. While presidential politics are but one piece of the global capital puzzle, private real estate executives say Biden’s more tempered demeanor, if nothing else, is expected to produce a more predictable style of governance.
“If the end result of this is going back to boring debates over tax codes, I’d welcome that over the polarizing culture wars that have been going on,” one capital raiser told PERE. “But that may be wishful thinking.”