U.S. Election Update - Impact on Commercial Real Estate

Presidential Election Update

• After an extended week of counting ballots, Joe Biden and Kamala Harris have been declared the President and Vice President Elect. Donald Trump has not conceded the election and while legal challenges and recounts are expected to continue, based on the legal cases made to date and margin of victory in key states, it is highly unlikely that the eventual outcome will be affected.

• The Electoral College is required to cast their votes for President and Vice President on the Monday after the second Wednesday of December which is December 14 this year. That means that states have a little more than a month to count ballots and conduct recounts if necessary.

• If on that date, the election results are still unclear or disputed, and if the outcome cannot be decided by the Electoral College process, then according to the 12th Amendment of the U.S. Constitution, the House of Representatives elects the President and the Senate elects the Vice President. That scenario has occurred only once in U.S. history when John Quincy Adams was elected this way in 1825.

• While there are several states that have been decided by slim margins, they are not thought to be within the margin of error such that a recount is likely to change the outcome – thus, while the process is expected to take days or weeks, it is anticipated to be resolved well in advance of the December 14 deadline.

• The bottom line: Joe Biden will become President of the United States, unseating incumbent Donald Trump, through a contested process but one that is unlikely to face challenge sufficient to affect the outcome.

Senate and House Election Update

• While races have not yet been called in Alaska and North Carolina, healthy leads by Republican candidates in those states result in the expectation that Republicans will hold 50 Senate seats, Democrats will hold 48 Senate seats and the two seats in the state of Georgia will proceed to a run-off in January of next year.

• Run-offs will occur for the two seats in Georgia due to state rules that mandate an automatic run-off between the top two candidates if the winner fails to achieve at least 50% of the vote.

• In the US House of Representatives, the Democrats are anticipated to maintain a slim lead and keep control.

• If both run-off elections are won by the respective Democratic candidates, the Democrats will have effective control of both the House and the Senate (a 50-50 tie is broken by the Vice President). If, however, the Republican candidate wins one (or both) of the Georgia run-off races, the Republicans will maintain control of the Senate.

• The final outcome of the US Senate will be critical to determine what policies the Biden administration is able to implement – if Democrats control both legislative bodies as well as the executive branch, it is to be expected that they will be able to implement their policies aggressively.

• Republican control of the Senate, however, which is the more likely outcome, is likely to serve as a limiting factor on the scope of policies that the Biden administration is able to implement, reducing the likelihood that large scale policy ambitions are realized. Importantly, spending and tax policy are controlled by Congress.

• The bottom line: The status quo of political gridlock is the most likely scenario.

Impact on US Property

• Historically, US commercial real estate has performed well under both parties in the executive branch with average annual returns differing little under different administrations since 1979 (see graph below).

• Rather than elections, position in the real estate market 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 commercial property values.

• There will be differences in the policies and priorities of a Biden administration versus a Trump second term, which will have impacts on the US economy and property markets and while it is important to understand what these might be and what impact they may have, ultimately what is implemented will depend on the course of events and what compromises are made during the legislative process.

• The bottom line: the outcome of the 2020 election is not expected to have a large impact on the prospects of US commercial real estate.

‍

‍

Tax Policy

• The Biden campaign has proposed several business income tax changes including raising the corporate income tax rate from 21% to 28%, which would make the US combined state/federal tax rate the highest in the OECD.

• The Biden campaign had also proposed a new alternative minimum tax (15%) on global book income and no reversal of corporate income tax base broadeners along with other sector-specific revenue raising proposals and several tax incentives related to climate changes aspects and US infrastructure investments.

• Specific to real estate taxation, the elimination of favourable tax treatment on 1031 exchanges (which allow investors to defer the capital gains tax from a property sale if reinvested in a different property within a 90-day period) and reducing exemptions for passive loss rules for rental losses could increase the potential tax burden on investors in US commercial real estate.

• Whether the Biden administration will be able to implement these proposed changes to tax policy will depend heavily on whether Democrats control of the Senate – a Republican-controlled Senate is expected to reject and block significant increases in taxation both overall and for the real estate industry.

• The bottom line: The Biden administration has proposed an agenda that would increase taxes and have an impact on foreign investors on commercial real estate but whether they can be implemented or not will depend on the Senate.

‍

9th Nov 2020

‍