Now What?

Wow. We are relieved to have the election behind us, and whether or not you are happy with the result, we’re guessing you are, too.

The uncertainty of presidential election season seems to throw a wrench into the decision-making process. This one was no exception, as the choices we had were at opposite ends of the political spectrum. At least now we know who the winner is and our general path forward is a bit easier to see. It’s kind of like putting new batteries in your flashlight on a camping trip. 

So, what can we expect going forward in terms of policies that are likely to affect the industrial real estate market and your wallet? Tax policy tops that list, no doubt about that. With a clean sweep of both chambers of Congress and a Republican sitting at the Resolute Desk, the probability that all or most of the key provisions of the Tax Cuts & Jobs Act of 2017 (TCRA) will be extended has gone way up. 

That control allows the new Republican majority in the Senate to use a legislative tool known as Budget Reconciliation to extend the tax cuts with a simple majority, bypassing the 60 votes needed to stop a filibuster by the minority party. So, we may see a reset of 100% bonus depreciation on plant and equipment, immediate write off of R&D expenses, a continuation of lower corporate and individual marginal income tax brackets and retention of the elevated estate tax threshold. Questions remain about whether or not there will be modifications to the State and Local Tax (SALT) limitation, which currently stands at just $10,000. A continuation of any of these provisions bodes well for owners of commercial property.

Another, perhaps less tangible benefit of the election result, is the psychological lift that comes with the notion that the new administration’s policies will be more business friendly. That was evident this past week as the equities markets jumped to record highs. Now, we have no way of knowing at this point if that is sustainable, but it points to a more optimistic view of the future as an immediate result of the election. Only time will tell if the political machinery will run smoothly enough to actually move us forward. We think it’s safe to say that everyone will experience disappointment on one issue or another. Politics, like sausage-making, can be a nasty business. So, it’s best to keep your seat belt loosely fastened at all times. These are turbulent times we live in these days.

The realities of the industrial market have not changed since last Tuesday. Buyers are still dealing with relatively high interest rates and premium pricing. Lease rates are still near record highs and supply of quality product is still thin by historical standards. Landlords are also facing longer lease-up times and bigger tenant incentives, as tenants over the past year have had less of a sense of urgency to relocate due to uncertain economic conditions. While the Fed lowered its benchmark Fed Funds Rate for the second time in two months, mortgage rates have actually increased due to a spike in the 10-year Treasury yield, the primary benchmark for setting commercial property mortgage interest rates.

Simply put, we are not out of the woods yet, but if the TCRA tax cuts get extended and the Fed keeps lowering rates without re-igniting inflation, we all may be able to make real estate decisions with greater certainty going forward. It’s early yet, and there are any number of issues that will probably keep us up at night. However, the biggest question of them all was answered last Tuesday night.