How Does Obama’s Second-Term Win Affect CRE?

With an acrimonious and seemingly endless presidential campaign finally completed, CRE experts are watching to see how newly re-elected President Barack Obama and Congress deal with a host of financial issues impacting the real estate market, including the budget deficit, debt and spending, tax rates, capital gains taxes and job creation.

Ken McCarthy, global chief economist, Cushman & Wakefield

With an acrimonious and seemingly endless presidential campaign finally completed, CRE experts are watching to see how newly re-elected President Barack Obama and Congress deal with a host of financial issues impacting the real estate market, including the budget deficit, debt and spending, tax rates, capital gains taxes and job creation.

They are also hopeful that the uncertainty which had been hanging over the business world, including commercial real estate, has been lifted.

“The main thing right now from the corporate America standpoint is people are just looking for some semblance of certainty,” said John Sikaitis, director of Americas Office Research Markets for Jones Lang LaSalle.

“The fact that we have someone and we now know where they say they will go goes a long way toward creating more confidence,” said Ken McCarthy, global chief economist for Cushman & Wakefield. “Over the last six months we didn’t know what the policy environment was going to be like. That’s the worst. Knowing who’s going to be president will be an important factor for the real estate industry and for the economy in general.”

Sikaitis said the President is going to have to extend an olive branch across party lines with the Congress that is going to remain split with the Republicans controlling the House of Representatives and Democrats continuing its majority in the Senate. He also said Congress needs to be less partisan to get legislation moving to help the overall economy.

“We need a Congress that actually legislates and compromises across the party lines,” Sikaitis told Commercial Property Executive. “This is currently the least effective Congress in history. This Congress has produced less legislation than any other Congress in 75 years.”

John Sikaitis, director of Americas Office Research Markets, JLL

Charles Achilles, vice president of legislation and research for the Institute of Real Estate Management, a Chicago-based association representing property managers, also said compromise will be needed in Congress but noted that gridlock historically results when different parties are in power.

In his acceptance speech early this morning, President Obama pledged to work across the aisle in his second term.

“Tonight you voted for action, not politics as usual,” he told a cheering crowd at Chicago’s McCormick Place convention center. “You elected us to focus on your jobs, not ours. And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together — reducing our deficit, reforming our tax code, fixing our immigration system, freeing ourselves from foreign oil. We’ve got more work to do.”

That work will begin immediately as the President and lame duck Congress will have to tackle the “fiscal cliff,” which includes a series of tax breaks expiring at the end of the year and deep cuts to agencies such as the Department of Defense and entitlement programs like Medicare that were agreed upon during the debt ceiling deal reached in 2011.

The potential spending cuts, also called “sequestration,” have already depressed the Washington, D.C. metro office market because so many government agencies or federal contractors have not been increasing long-term leasing, noted Sikaitis. He took it a step further by stating that tenant demand in the Metro D.C. market is tied strongly to Congressional activity. JLL research found that over the past 20 years, the office market in the region is strongest when passage of legislation is at its highest. For example, positive net absorption was at 52.4 million square feet between 1985 and 1988 when there was a record amount of legislation passed. During the past four years, the market saw cumulative absorption gains of 4.5 million square feet.

Charles Achilles, VP of legislation and research, IREM

The CRE executives pointed to possible changes in the capital gains tax structure sought by President Obama as an imminent problem for the industry.

“Owners who have a significant capital gain may want to sell before the tax increase. There could be some tax-driven activity,” McCarthy said.

Achilles said an increase in capital gains tax rate up to 20 percent from 15 percent for people making over $200,000 and couples making more than $250,000 could take away incentives for some people to invest in real estate.

He also said the Democratic plan to tax carried interest as regular income would have a big impact on his association’s members.

In addition to the probable ending of the Bush era tax cuts, new taxes to fund the Affordable Care Act (Obamacare) are set to begin in 2013. With Republican Gov. Mitt Romney losing the presidency, the Obamacare policies will continue to be implemented, which some say could impact job creation.

Also moving ahead will be regulatory changes to banks and financial institutions under the Dodd-Frank legislation passed during President Obama’s first term. Jeffrey DeBoer, president and CEO of The Real Estate Roundtable, said his group’s members have concerns about the impact of the Dodd-Frank regulations, particular those governing the commercial mortgage-backed securities (CMBS) market and the proposed Volker Rule, which he said could unintentionally impede real estate capital formation.

“The industry will continue working with national real estate trade groups to encourage a more robust recovery of the CMBS market, which will ensure a broader recovery in commercial real estate markets while strengthening financial institution balance sheets,” Deboer said.

Both DeBoer and Achilles said the Basel III capital accord that requires increased capital reserves by financial institutions could make it even more difficult for loans and mortgages to be made.

Achilles said CRE financing is still often difficult to get. He is particularly concerned about a program for small businesses that allows them to refinance loans on an annual basis. He said it expired in September and Congress has not extended it. The association’s web site noted that an estimated $360 billion of commercial mortgage debt is due within the next year and that many small business owners would like to turn to the Small Business Administration’s 504 refinancing loans for salaries, rent, utilities, to pay off or down credit debt and other financial obligations.

“What’s best for the country are those things that encourage small business,” Achilles said.