President Donald Trump took some of the country by surprise with his victory in November. The Republicans also continued their control in the House and Senate, as well as more dominance by elected officials throughout the country. Since Obama’s first election in 2008, Democrats have lost over 1,000 elected seats throughout the country.
In the next four or eight years, we will have to see what the Trump presidency means for commercial real estate. But we can already see some factors that will influence the direction of real estate from a legislative and executive prospective already.
The first of these is to rollback unnecessary burdensome regulations that have been established in the past. Trump comes into office with the background of a businessman and not a politician. So, he has experienced firsthand the challenges to business and real estate that are posed by rules which ultimately only benefit those who make and enforce them as compared to the good of the public. This has already shown in some of his executive orders aimed at easing the burden of Obamacare, one new regulation that must be replaced by repealing two order, directing every federal agency to set up task forces to identify and eliminate red tape, review of EPA regulations, and streamlining the approval process for development projects. Trump has held meetings with business leaders to learn of their challenges and appears to be willing to find ways to get government out of the way of business.
On the fifteenth day of his presidency, Donald Trump signed an executive order to direct the Treasury secretary to review the 2010 Dodd-Frank financial regulatory law. The House Financials Services Committee Chairman, Jeb Hensarling, has introduced legislation to eliminate parts of Dodd-Frank, including the risk retention rules for CMBS lenders. Hensarling has expressed his desire to completely repeal the bill, but there has been a lack of support in the Senate and until now, an unwilling President to do so. Now that Trump is in office, look for changes that would repeal portions of the bill and ease the regulations on community credit unions and banks and CMBS lenders. These should help provide easier access to credit for borrowers.
On the tax side, Trump has expressed an interest in lowering the income tax rate on corporations. We currently have the third highest tax rate in the world, behind the United Arab Emirates and Chad. A substantial drop will create more economic activity and provide upward pressure on real estate. Obama proposed increasing the top capital gains rate to 28%, while Trump has stated he will keep it at 20% and eliminate the additional 3.8% tax on net investment income. Also, personal income tax reform that leaves more money in the pockets of Americans will help grow the economy.
Some Republicans in Congress have also proposed allowing an immediate write off in an investment of buildings as opposed to the 27.5 or 39-year deprecation schedule. On the negative side, there have been proposals in Congress to deny the deduction of interest expense and limitations on the 1031 tax deferred exchanges. Exchanges and leverage are very important parts of real estate investors decisions. If any of those items were to occur, it would slow down commercial real estate activity.
President Trump has also proposed a trillion dollars in infrastructure spending. This will directly and indirectly benefit real estate by stimulating the economy. He has stated that he intends to encourage public-private partnerships and harnessing market forces to help attract new private infrastructure investments through a deficit-neutral system of infrastructure related tax credits. A strong commitment to improving our infrastructure is necessary to provide adequate resources and transportation avenues for our economy.
Yet this issue will face some challenges by Republicans in Congress, who remember the large infrastructure program Obama pushed through and how little was spent on the “shovel-ready” projects the former president claimed existed. Then, the House and Senate don’t always see eye-to-eye on issues, even when they are controlled by the same party. It is also unlikely that bills may be passed without a significant majority to avoid a filibuster, unless some moderate Democrats in the Senate join the bill.
The next positive impact on real estate has come from the number of companies that have announced their plans to expand production and office facilities in the United States. If tax reform occurs, without hurting real estate, and regulatory reform becomes a legislative reality, then we will see more bullish forces impacting our economy and commercial real estate.
These comments are on the real estate market as a whole. Of course, there are forces that are providing strong headwinds to certain sectors. Retail is facing struggles with the changing buying habits of consumers. Farmers are facing a new paradigm of what land prices will be with a possible long-term low commodity price cycle.
Perhaps the biggest factor in the decision to acquire or expand commercial real estate is hope. If the investor believes that there is hope that the future will be better than what it is today, they will look for real estate opportunities to invest. Recent surveys are showing that more Americans believe our country is on the right track. If that continues, look for the future of commercial real estate to be bright.