Should Investors Delay Commercial Real Estate Acquisitions in an Election Year?
If you think 2020 was the worst year in modern history, you may face a few dissenting opinions. The Black Death killed half the population of Europe in 1349. In 1520 smallpox killed between 60 and 90 percent of the inhabitants of the Americas. The Spanish Flu caused the deaths of over 50 million people in 1918, and in 1933 Adolph Hitler was appointed Chancellor of Germany leading to the deaths of 11 million people.
In retrospect, this may not have been the worst year ever, but it’s a close runner up. In addition to a pandemic and violent civil unrest, it’s an election year. At this writing, the outcome of the election is uncertain. Poll results can drastically miss the mark and have historically been inconsistent in predicting election outcomes. According to Southpace, one of the biggest factors influencing the performance of commercial properties during an election is fear of the unknown. This anxiety adds another level of uncertainty to an already challenging market.
A new report from Cushman & Wakefield analyzes the impact of the election:
Who will win and what it means for property?
- Property has performed well under both parties. Since 1979, NCREIF property index returns have averaged better than 8.5% annually under various Democratic and Republican administrations.
- Rather than elections, the cycle, the economy, interest rates, COVID-19 and geopolitical events are the areas to focus on in determining the impact on the leasing fundamentals and property values.
- Longer-term, different administrations have different spending priorities that will impact where growth occurs across the nation and what industries have greater growth opportunity.
- The impact on property will lag the election results, but it will be important to “follow the money” to identify potential opportunities or risks.
The Bottom Line
CBRE research suggests that presidential elections have little effect on volumes or returns. Federal elections can affect industries like oil & gas, health care and those that depend on military spending. Local elections, however, have more impact on commercial real estate because they involve property taxes, rent regulations, and related dynamics. The following CBRE chart illustrates the election-year impact on commercial real estate from 2002 through 2020.
Since 2004, overall investment volume increased on a year-over-year basis in every third quarter of a presidential election year except for 2008 during the Great Recession. Furthermore, every fourth quarter of a presidential election year recorded year-over-year growth, except in 2008 and 2016. In the first two quarters of the year following a presidential election, 2009 and 2017 saw negative year-over-year growth in investment volume. The drop in 2009 was largely attributable to the Great Recession. In 2017, modest investment volume in the first half of the year gave way to record volume in 2018.
How You Can Prepare for Potential Factors that Can Impact Commercial Real Estate
A new administration does, however, bring the possibility of updated policies that can impact commercial real estate. Knowing some of these potential policy pitfalls can prepare you to protect your assets and make smart purchases.
Cap Rate Fluctuation
A commercial property’s cap rate is the ratio of its net operating income compared to its original purchase price. The higher the cap rate, the more favorable the return. During an election year changes in interest rates and available inventory based on market shift can influence a property’s cap rate.
Unanticipated changes in trade agreements or embargoes with certain countries can cause industrial or regional disruption.
Tax Deductions and Credits
Updated tax legislation in the way of new tax credits, deductions, and liabilities can impact operating costs and positively or negatively influence a property’s cap rate.
Lower Appreciation Rates
Presidential elections have historically shown to be better for buyers than sellers. Both commercial and residential sectors tend to increase at a slower rate while the country waits for new policies and protocols, whatever they may be.
A presidential election should not be a reason to delay property transactions. An investor’s focus should be on sound underwriting practices that take local market conditions, demand for specific properties and cyclical events into consideration. Before we know it, this year will be far behind us and the next presidential election will be approaching.