As red states grow redder, and blue states bluer, CRE suffers.
How does deadlock affect commercial real estate?
As we’ve all experienced, political polarization has intensified in the past few years despite more consistent party platforms, both in the House and the Senate.
As the blue states go bluer and the red redder, several industries have suffered, including commercial real estate.
"Legislation at the federal, state and municipal levels can adversely affect commercial real estate development as much as market fluctuation, supply and demand, or labor." - Chuck Sudo, Bisnow Chicago
Property owners and operators' concerns began with the slow recovery from the 2008-2009 recession. The progressively slowing post-recession growth is reflected in:
- The national unemployment rate, despite historic lows, rising to 3.6% as of January 2020[i]
- The labor force participation rate at 63.3% (as of October 2019)[vii]
- Job creation growing slightly less than the population growth rate
Counting the Economic Cost
Deadlock not only erodes public faith in the political system; it affects our daily lives. Lately, it seems the economy has fluctuated with every major political battle.
In 2017, it was when a national infrastructure bill stalled despite bipartisan support. The bill was intended to "fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools and hospitals."[viii]
Though consistently 2/3 of Americans say infrastructure spending is 'very important', virtually no political moves have been made.
The reason no infrastructure bills have been passed is because of differing opinions on what counts as infrastructure spending: a number of conservatives want to put the funds toward building a border wall, while many liberals cannot support such spending.
Multifamily, office, retail, hospitality, and more sectors of the economy are being negatively affected by deadlocked government.
'Sustained Disruption' for CRE
Roads, water, and physical networks: these are all parts of society that most citizens use daily, and the related industry has taken a blow due to political gridlock.
While politically motivated decisions on tariffs and taxes have had a significant effect on CRE, other debates have slowed down many changes at the federal level. These political polarization arguments lead to long-term gridlock.
"For example, the U.S. Department of Transportation has now twice delayed promised capital grants to local transit agencies. Similarly, Congress and the Federal Aviation Administration cannot agree on how to manage and comprehensively fund a new satellite-based air traffic control system. They’re all guaranteed ways to raise infrastructure costs in the long-term and reduce public trust today."[iv]
Scott Muldavin, president of the Muldavin Company, stated that political gridlock is a problem that, he foresees, will persist in working against the CRE industry over the next 10-30 years.
He states that "political gridlock increases the overall uncertainty on how we're going to solve big problems. I'm not saying everyone needs to sing 'Kumbaya' and hold hands, but we do need to have civil discourse."[viii]
Tariffs & Taxes
Since the current administration placed tariffs on imported steel and aluminum, the cost for steel mill products have risen 14% from March 2018 to January 2019.[iv]
Construction, transportation, and water authorities have all been affected by this massive jump in cost of imported goods, to name just a few.
Construction has been one of the most affected areas, as it experiences large changes in material costs, pricing volatility, budget uncertainties, delayed deliveries, delayed completion, lack of material supply, and contractor default and abandonment.[ix]
If no changes are made and tariffs continue to be implemented, political experts say many infrastructure and construction projects are going to be delayed or cancelled altogether, indefinitely.
How will the 2020 election effect commercial real estate?
While elections influence almost every industry, the commercial real estate vertical is one that political changes have a massive potential for change.
Some of the common areas that experience the most turmoil in the transition from one administration to another are:
- Cap rate fluctuation
- Trade policy
- Tax deductions and credits
- Alternative appreciation rates
Planning for a Strong Future
When planning future projects, it is important to know if you and your team will be facing any policy-related challenges. These challenges could be on a city, state, or federal level, and they are important to watch out for. Political polarization has led to increased Congressional deadlock, and there is every indication that this will be an issue for the foreseeable future.
As these issues continue, it is imperative that businesses be transparent with their teams about how government policy could impact their daily work so everyone can work to find the best solutions. Jake Varn, Policy Analyst at the Bipartisan Policy Center, stated "Infrastructure is an intersectional issue: It impacts education, it impacts housing; it impacts climate."[vii] As new political storm clouds brew, CRE executives must think about how best to navigate the winds of policy change.
Sources
[i] https://www.cre.org/external-affairs/2019-20-top-ten-issues-affecting-real-estate/
[ii] https://www.nuwireinvestor.com/political-gridlock-threatens-commercial-real-estate/
[iii] https://southpace.com/2020-presidential-election-commercial-real-estate/
[iv] https://www.brookings.edu/blog/the-avenue/2019/04/25/political-gridlock-blocks-infrastructure-progress-and-costs-our-economy/
[v] https://www.statista.com/statistics/273909/seasonally-adjusted-monthly-unemployment-rate-in-the-us/
[vi] https://www.investopedia.com/terms/p/participationrate.asp
[vii] https://www.csmonitor.com/USA/Politics/2019/0522/Both-parties-agree-infrastructure-needs-fixing.-So-why-hasn-t-it-happened
[viii] https://www.marketwatch.com/story/the-top-10-threats-facing-real-estate-2012-07-17
[ix] https://www.bestlawyers.com/article/trump-tariffs-harm-construction/2496
