Commercial Real Estate (CRE) as a whole is not a huge driver of the overall GDP in the U.S. The entire industry (Existing and New Construction) accounted for less than 2% of the U.S. GDP in 2011. While this is not entirely insignificant, you will not hear many politicians worried about the Commercial Real Estate industry since that does not drive votes. Despite our relatively small impact on the overall economy, this election is still important in our industry.
Notwithstanding your political affiliation or where the polls are leaning, stock market investors and real estate investors don’t like uncertainty, especially on the national level. Whether the Democrats keep the White House or the Republicans gain control, investors still want to make money, so it will simply be a matter of what CRE Investors will invest in and what returns they will require.
Since 1900, the average annual return of the Dow Jones after a Republican is elected has shown a 10.3% increase while the average return after a Democrat has been elected has been a 3.9% increase. These are not always because of the actual policies that either administration implements but rather a “feeling” by investors of which direction the administration is most likely going.
This is the same in real estate investing, where we tend to focus on the after-tax dollars. Traditionally, the Republicans are going to maintain and/or cut taxes while the Democrats tend to either maintain and/or increase taxes, usually going after Capital Gains taxes, which are so important to all of us. CRE Investors will continue to invest with either a Republican- or Democratic-controlled White House. It may just change the required returns to off-set the risk. Many private equity firms are temporarily on hold, not to decide if they will invest but how they will invest based on political history.
A closer look at the average return of the S&P 500 under a Democratic-controlled White House yielded a very modest 4.5% increase while a Republican controlled Congress has yielded a 21.3% increase. Balance apparently is not the answer either as the S&P has increased on average of 12.1% when EITHER party controls BOTH the White House and Congress versus 7.1% when there is a split between Congress and the White House. Meanwhile, politics aside, CRE has benefited from the Fed’s most recent move on QE3. Interest rates have created a bonanza for leveraged cash flow buyers as the GSE & CMBS markets have rallied providing investors with a variety of favorably-priced financing options.
While the stock market increases are interesting statistics, in Commercial Real Estate, taxes will dominate our growth. One thing is certain, that under either party’s control, CRE investing will continue. It is just a matter of time to see how the politics actually translate into real returns.