With the U.S. election less than two weeks away, the commercial real estate industry is focused on how the outcome of the races could affect finance and investing activity.
The presidential election is said by some analysts to be a toss-up at this point, and the U.S. House and Senate majorities are seen as too close to call. However, there are key assumptions from each party’s campaign policies and promises that are helping to shape the property industry’s expectations on taxes, bank capital, and housing.
No matter which candidate or party wins the most races, the results could have narrow margins. And in such a tight election season, the influential CRE Finance Council trade group said it would take difficult and perhaps unlikely bipartisan cooperation to make dramatic changes in policies.
“We should take any campaign promises with significant grains of salt, especially ones that involve congressional action,” David McCarthy, managing director and head of legislative affairs for the CRE Finance Council, told CoStar News in an email. The council is the largest trade association for the commercial real estate finance industry, with members including lenders, loan and bond investors, debt servicers, and rating firms.
“Many election scenarios involve divided governments," he said. Referencing a federal political environment where the same party controls the executive branch and both chambers of the legislature, he added that "even in the ‘trifecta’ situations, we expect the House and Senate to be close. And that means there will be a natural moderation in when bipartisan action is necessary,”
Taxes front and center
Taking policies at face value, taxes seem to be the most significant and most likely to see action, McCarthy said. The next Congress and administration will see a number of the provisions enacted by the 2017 Tax Cuts and Jobs Act expire at the end of 2025. That presents a likelihood for new tax policies.
In scenarios in which a party sweeps, tax bills can be passed with simple majorities with reconciliation, which heightens the risk for certain partisan provisions, according to McCarthy.
Republican candidate former President Donald Trump’s plan is constantly evolving, he said, but there seems to be a baseline of extending the Tax Cuts and Jobs Act while cutting the corporate rate, and eliminating certain individual taxes on types of income.
“While Trump isn’t proposing any tax hikes, lawmakers may seek to retool other aspects of tax law to offset some of the tax cuts. And that introduces risk to [commercial real estate] taxation,” he said. “If tax burdens on [commercial real estate] go down, that’s probably a good thing, but I’m not seeing any obvious policies that drive it. But if paying for these other provisions requires offset taxes that impact [commercial real estate], that’s probably not great at a time where [commercial real estate] is facing a lot of other challenges.”
On the Democrat side, Vice President Kamala Harris has proposed tax increases as part of her campaign along with certain tax credits benefiting new parents and homeowners, McCarthy said. In this campaign season, Harris and the Democrats have focused on boosting the capital gains tax and taxing wealthy Americans' unrealized gains.
“Higher capital gains taxes are concerning for real estate, especially as we are experiencing this downturn and shift in use,” McCarthy said. “At the end of the day, it raises the costs on investment and could curtail market activity as holders potentially hold out for higher sales prices to make up for the increase in taxes.”
More concerning to the CRE Finance Council and other industry trade groups is the potential impact of a wealth tax.
“The unrealized gains portion would be truly problematic" for commercial real estate, he said. “What they’re proposing is focused on ultra-high-net-worth individuals, so the scope is limited, but if someone had to be taxed on their unrealized gain on real estate, that would seem to be a very strong disincentive to hold real estate.”
The Trump and Harris campaigns didn't respond to requests from CoStar News to comment.
Risk management
On the regulatory front, the industry is keeping watch on proposed bank rules known as the Basel III Endgame, a set of international regulations designed to strengthen supervision and risk management. The Basel III Endgame, developed after the global financial crisis by a committee that meets in Basel, Switzerland, focuses on the amount of capital banks must set aside to cover the credit, operational, and market risks of their business. The regulations have implications for lending given the amount of capital banks must hold, should the United States choose to participate.
The rules are expected to be sensitive to who wins the White House, according to the CRE Finance Council’s Sairah Burki, managing director and head of regulatory affairs and sustainability.
“With Trump, we would anticipate an unwinding, or significant scaling back, of the pending rulemaking,” Burki said.
Under a Harris presidency, the CRE Finance Council would expect the capital rules to be finalized in some form, as Harris could veto any congressional attempt at repeal and appoint regulators more likely to support higher capital requirements, Burki said.