As the US election approaches, CRE leaders are closely watching for potential policy shifts that could impact the industry. But, while the election generates some market uncertainty, the immediate effect on CRE is likely to be minimal. Below are the key areas that CRE leaders should be aware of in the longer term to help protect their assets and portfolios.
Potential Tax Policy Changes
Changes in tax policy are one of the most closely monitored areas for CRE investors during election seasons. A new administration could introduce adjustments to capital gains taxes, corporate tax rates, or property depreciation rules; all of which could influence the CRE landscape.
A more business-friendly administration might implement tax cuts that spur growth and increase demand for office and industrial spaces, while a government prioritizing social programs may increase taxes on investment gains. While we don’t know who will gain office, key proposals are known.
A glimpse into potential policy changes on tax:
- Harris has proposed increasing the corporate tax rate from 21 to 28 per cent and increasing the capital gains rate to 28 per cent for those making $1 million or more (Commercial Search).
- Trump has called for cutting the corporate tax rate from 21 per cent to a range of 15 to 20 per cent (Commercial Search).
While high tax rates could discourage corporations from developing new properties or expanding existing ones, low corporate taxes, along with incentives such as tax credits for new developments, can stimulate growth and construction. But, this is only one policy voters with a CRE perspective will need to consider.
Combatting the Housing Crisis
Both Harris and Trump’s approach to combatting the housing crisis could significantly affect the CRE industry. While Harris’ approach emphasizes regulation to encourage affordable housing, Trump focuses on deregulation and homeownership incentives. Let’s get into the detail below.
Harris’ plans
- Kamala Harris has indicated her policies will likely align with those of the current Biden administration, focusing on affordable housing and tenant protections. Harris has committed to building 3 million housing units over four years, with tax incentives to encourage developers and local governments to support new construction.
- There would likely be a push for temporary rent control measures and funding programs to remove regulatory barriers, making it easier to secure permits for development.
Harris also voiced support for policies that would ban setting rents with algorithmic pricing systems and introduce new regulations for corporate landlords. This follows the Biden-Harris administration’s plan to cap annual rent increases for large landlords at 5% over the next two years.
Trump’s plans
- Donald Trump has signalled a different direction to Harris, with a focus on reducing housing costs by deregulating the housing industry. He aims to dismantle restrictive zoning laws, reduce permitting requirements, and streamline environmental reviews that increase costs for developers.
- Trump’s policies are designed to promote homeownership through tax incentives and regulatory rollbacks, which could benefit CRE developers involved in residential construction.
- He also supports expanding his Opportunity Zone program, providing tax incentives to invest in underserved areas – a potential boom for commercial developers.
Interest Rates and Monetary Policy
While interest rates are controlled by the Federal Reserve, the election can indirectly influence monetary policy through the fiscal stance of the elected government. As a result, CRE leaders should consider how higher interest rates may affect cap rates and property valuations. Here’s how the policies of each party may influence the outlook on interest rates:
Under a Harris Administration: Kamala Harris would likely continue the current administration’s focus on reducing inflation and managing the deficit more cautiously. The Federal Reserve under this scenario may lean toward lowering rates, especially if inflation is under control, to stimulate economic growth and consumer spending. However, this would also depend on how effectively they manage inflation and debt levels.
Under a Trump Administration: If Donald Trump were to win, his policies could lead to higher interest rates. Trump’s proposals to extend and expand the 2017 Tax Cuts and Jobs Act could significantly increase the federal deficit, which might push up inflation and borrowing costs. A larger deficit typically leads to higher long-term interest rates due to the increased demand for borrowing by the government. Additionally, Trump’s protectionist trade policies, like tariffs, could increase inflationary pressures, which would likely lead the Fed to maintain higher interest rates to combat inflation.
Historically, sectors like multifamily and industrial real estate have shown resilience in inflationary environments due to their ability to raise rents, but offices and retail sectors could face more pressure in a bad borrowing environment.
Environmental and Climate Regulations
Kamala Harris and Donald Trump propose vastly different policies on climate change, reflective of broader ideological divides. While Harris strongly supports addressing climate change through robust regulations and clean energy investments, Trump emphasizes deregulation, prioritizing economic growth through increased fossil fuel production.
Harris’ view:
- Harris helped pass the Inflation Reduction Act as Vice President, a major climate initiative that aims to reduce greenhouse gas emissions, promote renewable energy, and incentivize electric vehicle (EV) adoption.
- Harris also backed the Green New Deal, a more progressive plan aimed at transitioning the U.S. to 100% clean energy while addressing social and economic inequities.
CRE leaders should be aware that a Liberal government focused on environmental sustainability could introduce stricter regulations that affect the CRE industry. New policies on carbon emissions and energy efficiency standards may increase operational costs for developers and property managers. Yet, it would also provide opportunities for CRE leaders who invest in sustainable, green-certified buildings, as tenant demand for eco-friendly spaces continues to rise.
Trump’s view:
- Trump emphasizes deregulation while prioritizing economic growth through increased fossil fuel production.
- His climate policies focus on bolstering oil, coal, and gas industries, with plans to repeal major portions of Biden’s climate initiatives, like the Inflation Reduction Act. Trump criticizes stringent environmental regulations as harmful to economic competitiveness and promises to dismantle “climate scams” that he claims cost the U.S.
CRE owners should be aware that while Trump’s deregulation efforts aim to boost economic growth and housing availability, they pose significant risks to environmental protection. This could lead to increased pollution, habitat destruction, and a reluctance for the environmentally conscious to invest in deregulated areas.
Foreign Investment and Trade Policies
Election outcomes can have a profound effect on U.S. trade policies, which in turn influence foreign investment in CRE. A protectionist administration could impose tariffs and stricter immigration policies, potentially reducing foreign capital flows into U.S. real estate.
On the other hand, a government that promotes international trade and investment could see an increase in demand for U.S. commercial properties, particularly from global investors.
CRE leaders with portfolios exposed to foreign markets or reliant on international capital should monitor the election’s impact on global trade relationships, especially with major partners like China and the European Union.
While an increase in corporation tax may be offputting for foreign investment, it’s possible that a lack of environmental consciousness will be more offputting than many may think.
Focus on Long-Term Fundamentals
While the U.S. general election may introduce short-term market uncertainty, the CRE industry’s performance will largely depend on broader economic factors like interest rates, inflation, and employment trends. CRE leaders should remain focused on long-term fundamentals and be prepared for potential shifts in tax policies, interest rates and regulations that could influence their portfolios in the years to come.
The overall message for CRE leaders is to stay the course, monitor policy developments closely, and avoid reactionary moves based solely on election outcomes. As highlighted by CBRE, the real drivers of the industry- economic growth, interest rates, and investor confidence– are likely to be far more influential than the results of the 2024 election.
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