Everyone 'Knows' Elections Impact CRE. But Does The Data Back It Up?

To borrow from satirical novelist Jane Austen's most celebrated opening line, it is a truth universally acknowledged that a commercial real estate investor must beware of election years.

With the 2024 presidential matchup mere months away, anecdotal evidence suggests the industry is clinging hard to that mantra, mostly predicated on a longstanding belief that election seasons can be precarious times to buy, sell or lease. The subject has come up repeatedly at Bisnow events, and even EY warns that “the elections will have an impact on real estate investment.”

But whether the results of an election have a material impact on portfolio performance is little understood and not backed up by the numbers, making any assumption about linkages precarious. In an era of extreme partisanship, basing investment decisions on politics is risky business, prompting experts to warn against the influence of bias as election rhetoric heats up. 

“Investing on emotion is a bad idea,” Nationwide Financial Chief of Investment Research Mark Hackett said. “Investing on political emotion is potentially catastrophic.”

Data suggests that uncertainty around elections tends to have a negligible effect on commercial property transactions, with little to no impact on the volume of leases or sales shown over the past five elections. Perhaps more importantly, there is very little data to suggest the outcome of a federal election has a material impact on investment returns.

“There is very little correlation between who is in power and the strength of the market,” Hackett said. “There is really no discernible pattern.”

Despite those statistics, nearly half of investors in a recent Nationwide survey said they believe the results of presidential and congressional elections will have a greater impact on their portfolios than market performance.

Concerns tend to be evenly split along party lines, with the same percentage of investors worried about the opposing party gaining power as those who fear the current administration keeping power. 

Yet apprehension doesn't necessarily translate to depressed activity. Quarterly office data from JLL shows that while leasing volume tends to be front-loaded to the first two quarters of an election year, overall leasing volume is only 0.9% lower than in nonelection years. 

Sales transaction data provided to Bisnow by MSCI Real Assets paints an even cloudier picture, with year-over-year transaction volumes fluctuating wildly across election years dating back to 2004.

“People are very nervous,” Hackett said of investor sentiment during this election cycle. “But it isn't necessarily prescriptive of what will happen in the market, because some people will say they’re nervous but continue to act.” 

As elections become more contentious, consternation around who will land in the White House has grown in tandem, but allowing politics to dictate CRE investment decisions would be misguided. The industry is more heavily impacted by interest rates than government legislation, said Timothy Savage, a clinical assistant professor at the New York University Schack Institute of Real Estate.

To the extent that politics play a role, the party of the president only matters if there is alignment with Congress, Savage added.

“When there’s gridlock in Washington, developers and investors are focused on monetary policy,” he said. “When there is a chance that something might actually get done, you have to focus on both monetary policy and fiscal policy.” 

Many believed the alignment between then-President Donald Trump and his Republican-controlled Congress would result in a favorable environment for commercial real estate.

But it still took several years for those supposed benefits to take hold, Savage said.

“There was very little activity until the opportunity zone law [was implemented] in 2019,” he said. “That was probably the most pro-development approach that we’d seen in tax law in a long time.”

Gridlock has historically killed government spending, though that hasn’t been the case lately. For that reason, today’s CRE investors would be wise to also consider the implications of fiscal policy, Hackett said.

“We’ve been spending like crazy since the pandemic, and it hasn’t really killed the dollar or killed the economy,” he said. “It obviously hurt inflation and moved interest rates higher … but the powers that be are willing to make that trade-off.” 

Capital gains tax reform tends to be the driving factor behind any pickup in real estate transactions prior to an election, as some investors choose to expedite the timing of deals if they expect the tax rate to go up, said Maher Maso, a principal in Ryan’s Dallas office.

Regulations set at the local and state levels are generally what matter most to CRE, however, especially when it comes to corporate relocations, Maso said. The snowball effect of policy decisions made over the course of several elections can be the impetus for a company choosing to flee one state in favor of another.

“It’s election after election of putting more burdensome rules on businesses, to the point where they slowly say, ‘That’s enough. We’re moving to where we can be more successful,’” he said. “It’s never one election. It’s the progression of elections and policies.”

Preconceived notions around the relationship between election results and portfolio performance ought to be tossed out the window this year, in particular, said Stuart Elizabeth Baldwin, partner at Hodes Weill & Associates. 

The slowdown in deals seen over the past 18 months has everything to do with rising interest rates and a lack of liquidity and little to do with investors pausing decision-making ahead of the election, Baldwin said. It would be equally misguided to credit an acceleration of transactions to who becomes president, she said.

“It’s hard to take any sort of pattern we’ve seen in the past and apply it to this year just given the base we are starting at,” she said. “If trades start happening because there’s a decline in prices, I don’t know if we can say it has anything to do with the election this year.” 

Certain CRE investors are more susceptible to acting on political fears, especially if they are allocating out of a retirement account, Hackett said. But the direction of interest rates remains the driving force behind investment decisions today.

“At the margin, people’s nervousness about the direction of the election could influence allocations. It’s not inconceivable,” Hackett said. “But interest rates are first, second and third.”

Turmoil in the economy tends to magnify concerns around the results of an election. But rather than getting distracted by who might become president, Maso said investors should pay attention to other potential headwinds, such as geopolitical issues or the supply chain consequences of the Baltimore bridge collapse. 

“Our economy is stable,” he said. “But the stability doesn’t feel very strong. I worry about things that could really push the instability over the edge.”