How a Presidential Election Affects Commercial Real Estate
As the primary season continues (despite some postponements because of coronavirus), the November election draws closer. What does this mean for commercial real estate? If history is any indication, then similarly to investors in the stock market, buyers and sellers of real estate prefer to lie low. There is typically a lot of uncertainty about what’s ahead, so owners and investors will likely adopt the position of “wait and see.” That uncertainty is because a new administration—whether an incumbent’s or not—may affect trade policies, interest rates and tax law. Read on to learn more about how a presidential election affects commercial real estate.
Beyond investors’ fear of the unknown, a new presidential administration—whether Republican or Democrat—does not usually lead to upheaval in real estate markets. Nevertheless, there might be new policies enacted that can affect commercial real estate valuations and the overall return on an investment. Factors to consider include:
- Cap Rates
- Tax Laws
- Trade Policies
- Appreciation Rates
Changes in Cap Rates
A cap rate is a frequently used and versatile tool in investment analysis. It can be used to measure the potential return on a real estate investment or to determine the market value of a property. Cap rates are typically expressed as a percentage. Lower cap rates indicate that the overall risk assessment and return on investment are low. Conversely, the higher cap rates indicate high risk and return.
To arrive at the cap rate on an investment property, the net operating income, or NOI, is divided by the current market value, or sales price. (The NOI is equal to revenue from the property minus operating expenses.)
During any year, there are several factors that can affect cap rate including the type of asset in question and its location. But during an election year there is the added variable of changes in interest rates. A new administration could be a catalyst for rates that go up or down. Also, a new policy might influence the market, which in turn could impact available inventory. All of these have the potential to affect cap rates.
After a presidential election, it is not uncommon to see changes or updates to current tax laws. Specifically, these may pertain to credits, deductions and liabilities, which could affect operating costs as well as a property’s cap rate. On the one hand, new deductions could make a commercial real estate purchase even more of a good investment. On the other hand, a change in the law might increase tax liability when a property is sold.
Trade policy is certainly on the periphery of what can affect commercial real estate. Nevertheless, policy revisions can incidentally affect different segments of the real estate market. For example, an embargo or changes in trade protocol with a foreign country can disrupt varied industries or regions of the United States.
Historically, buyers fare better than sellers during presidential election years. That’s because commercial property prices—and residential too for that matter— rise more slowly as everyone waits for the results. Thus, sellers might end up losing.
But of course, the operative word during an election year is still uncertainty. So buyers and sellers may all just decide to wait and see.