At Schelin Uldricks & Co., we interact with real estate investors daily and one of the current topics of conversation we run into is what the upcoming general election results might mean for real estate investing. While it is impossible to accurately predict election results, it is helpful to understand potential outcomes.
In our view, there are four scenarios to generally consider:
- Republican Sweep
- Democrat Sweep
- Mixed Government with Republican Executive
- Mixed Government with Democrat Executive
High Level Takeaways: The Tax Cuts and Jobs Act expires in 2025. The tax code could be vastly different in the next year or so; could new Opportunity Zone legislation make its way into the mix? Extension or modification of the TCJA will likely be the first big piece of legislation for the new administration. Depending on the outcome of the election, this is where we will see the newest economic policy become codified and potentially have a large impact on real estate investing. Loose border policy means more people enter the country and need housing; good for developers, multifamily owners, and companies that employ large numbers of low-wage workers. Democrat handouts for new home purchases probably have an outsized impact on home prices in lower priced markets. Republican platform includes pumping more oil. This is deflationary so could have an impact on interest rates in the short term. Mixed government means less bold action takes place and there is a slower pace of change as the parties haggle over competing party priorities.
Republican Sweep
In this scenario, the Republican platform will likely revolve around an expansion of fossil fuel supply, import tariffs, border security, tax cuts (at a minimum an extension of the TCJA).
What do these mean for real estate? Let’s break them down individually:
Fossil Fuel Supply: Fossil fuels are an integral part of commerce in the United States and the price of oil has a direct impact on the price of goods. Petroleum based inputs are used in many products. Oil and gas are used to transport finished goods around the country so a decrease in cost along the supply chain probably trickles down to prices. Additional fuel supply could have the effect of lowering the price of goods and lessening the annual expense consumers feel at the pump. Lower oil prices typically lead to higher consumer sentiment which could result in higher goods consumption. This scenario generally supports retail real estate, hospitality, and multifamily. Consumers feel better about the economy and are willing to spend more on new consumption, travel, or trade up to nicer apartments. Could help moderate inflation which is likely to result in lower interest rates.
Import Tariffs: Tariffs are effectively a tax on imports and tend to make imported goods less desirable due to their comparatively increased cost. Our view is that tariffs are mostly used as a negotiating tactic with trading partners to modify the terms of existing trade relationships. For example, the USMCA trade deal was negotiated via the threat of additional tariffs to facilitate a new arrangement. If tariffs are broadly enacted, we would expect a slowdown of imports and exports and the potential for retaliatory tariffs which could have a negative effect on certain markets or businesses that are reliant on import/export business.
Border Security: The large increase in immigration to the US has increased the number of low-wage workers in the country which has the effect of keeping wage inflation for low skilled workers tightly managed. If Trump era executive orders are put back in place, we would expect to see the number of new immigrants reduced moving forward. We are skeptical that a large-scale deportation of existing illegal immigrants is ever pursued during a new Republican administration. If you believe the estimates that tout 12,000,000 new illegal immigrants entering under current administration, then the new administration would have to deport 3,000,000 immigrants per year. This means 8,200 immigrants per day which translates to approximately 50 full flights per day. Our view is that any deportation will be limited in scope to immigrants with a criminal background. How does this effect real estate? Wages for low skilled workers may increase so industries with a high percentage of low skilled labor may see deteriorating profit margins. This could be inflationary on many goods and services or result in labor offshoring. Generally, we think this could be positive for work-force housing and housing in general. Housing is still in short supply in many markets. We would expect to see increases in rents, and home prices.
Tax Cuts: There are many elements to the Tax Cuts and Jobs Act so we could write a whole piece on what this could mean for real estate investing. Our focus will be on what a vanilla extension of the TCJA would mean for consumers. A large part of the TCJA was the state and local tax deduction cap which had an outsized impact on consumers in high tax coastal states. The SALT cap effectively raised taxes on high income earners in high tax states. An extension of the SALT cap would likely continue to keep high income earners from spending at the same levels pre-TCJA and focus increases on spending to the southwest and southeast US. A continuation of the TCJA in its current form could include a renewal of the Opportunity Zone legislation which was a big boon for real estate developers and real estate investors. Opportunity Zones have not gotten a lot of coverage in this election cycle, but the OZ legislation did funnel an immense amount of capital into red and blue districts, so it had bi-partisan support in 2017.
Democrat Sweep
In this scenario, we would expect to see an expansion of renewable energy supply, tax increases on top earners, expansion of domestic financial assistance programs, and a pro-immigration stance.
What do these mean for real estate? Let’s break them down individually:
Renewable Energy: Solar, Wind, Nuclear, and other renewable energy sources are likely to be favored over fossil fuels in a Democrat sweep so an expansion of renewable energy supply seems a likely policy stance. New energy is needed to power the AI revolution so we would expect an uptick in the demand for all forms of energy in the future. Renewable energy sources may eventually decrease the reliance on fossil fuels. We would expect industrial real estate to continue to see increased demand, especially as it relates to data centers. We would expect new jobs to be created in the energy sector around renewable energy sources in the non-traditional energy markets. We would also expect an uptick of new development and construction on the renewable energy front. The Inflation Reduction Act incentives accelerated the creation of many new solar projects. Any new political action in similar to the IRA will supercharge growth for renewables. We would expect to see additional jobs created in the renewable energy sector and the potential for lower power costs for consumers over a period of time.
Tax Increases: We would expect to see many of the policies in the TCJA which created losers in the coastal lean-democrat states to be lifted like the SALT deduction in a Democrat sweep. Many of the policies proposed are unlikely to pass even in a Democrat sweep such as taxes on unrealized capital gains. We do, however, expect incremental increases to the top marginal tax brackets which could slow down high-end consumption and investments. We would also expect corporate tax rates to go up in a Democrat sweep which may create an exodus of companies out of the US through an outsourcing or offshoring of companies. The TCJA allowed a repatriation of foreign earned profits back into the US at a lowered tax rate. A reversal could result in more capital staying offshore thus limiting corporate growth and investment. In other words, tax policy always creates winners and losers. Our view is that the winners in a democrat sweep are amongst the coastal enclaves of wealth.
Domestic Financial Assistance: Many of the policies framed in this cycle include support for working class families through home down payment assistance and expansion of the child tax credits. We would expect that those policies are supported by the increase in taxes to individuals and corporations. The stated goal of the policies is to assist certain effected groups in making their lives easier through homeownership and reduction of taxes for families. It is widely known that homeownership is a path to wealth for families in the US. Home prices tend to rise with inflation and if the family can hold on to the home for several years, they build equity and net worth as they amortize the balance on their home loan. Due to the recent meteoric rise in home prices, the affordability of housing has gone down so to increase the buyer pool, government assistance may be needed. A major hurdle to purchasing a home is a down payment which is typically 20% of the home’s purchase price. The new planned policy of $25,000 for first time home buyers could increase the price of homes in certain markets. We would expect the down payment assistance program to have a larger impact in lower priced markets where $25,000 could represent a significant portion of a down payment on a new home. We would expect this assistance to increase prices because this policy increases the number of buyers not necessarily the number of sellers so it’s more capital chasing the same scarce amount of goods which would lead to higher home prices in markets where buyers outweigh sellers and the assistance is meaningful enough to move the market.
Pro-immigration: Our opinion is that a democrat sweep would result in pro-immigration policies and a rapidly growing population in the US. The higher the population, the more housing units are needed. We believe there is an immense underlying demand for affordable rental housing across the US because of the shear increase in population through legal and illegal immigration over the last four years. If this trend continues, the supply for housing will continue to lag against the demand for housing. We would expect to see rental rates for multifamily to outpace inflation moving forward. This could be a good environment for developers to deliver affordable units in the suburbs or exurbs where land is less expensive and correlate to lower offered rents.
Mixed Government with Republican Executive
Executive orders on border security & drilling, new trade deals, emphasis on foreign policy, extend modified TCJA to avoid tax increases, limits on new regulation
We would expect a mixed government to get less accomplished than a clean sweep. Most of the new initiatives will be handed down by executive order with an emphasis on increasing fossil fuel production through new pipelines, land leases for exploration. We would expect tariffs to continue to be threatened in order to get new trade deals. Trade deals still need congressional approval which could result in delayed action by congress. We would expect that in a mixed government, bold tax changes are unlikely. Depending on the magnitude of the congressional majority, there could be an impetus to extend with minimal changes. If the pendulum swings the other way, with democrat control of both houses, expect the extension to look a lot different.
Mixed Government with Democrat Executive
Status quo from current administration, let TCJA expire or extend with new Democrat initiatives, border policy hot potato.
In a mixed government, we would expect many of the current administration policy goals to carryover but there would be less desire to extend the TCJA. We would expect the tax code to revert to pre-TCJA. On the executive order front, we would not expect much to change on the border. This issue will likely be used as leverage to negotiate new legislation to deliver the democrat policy wish list in a mixed government.