Only 20 days out from the presidential election, the CRE market is already anticipating changes that may come with the new administration. The Republican trifecta victory will substantially impact both the number of policy changes and how big the changes will be, said John Chang, national director of research and advisory services at Marcus & Millichap.
He highlighted three focus points of the Republican campaign that could impact the CRE market:
- The renewal of the 2017 Tax Cuts and Jobs Act provisions that are scheduled to phase out or expire in 2025.
- The implementation of broad-based trade tariffs.
- Potential changes in immigration policies and the deportation of illegal immigrants.
The impact is most visible in the interest rate outlook since early October when betting odds began to favor the re-election of President Trump, said Chang. Since then, the 10-year treasury has climbed about 70 basis points, and the rise of interest rates puts upward pressure on the cost of CRE financing.“The reasons behind this are multifaceted, but many economists cite the inflationary nature of several of President-elect Trump's proposed policies. Both tariffs and reduced immigration, let alone deportations, could lift inflation,” said Chang. “And in addition, many of the tax policies proposed by President-elect Trump could result in an increased federal deficit. Substantively increasing the deficit would likely require increased issuance of treasuries, which could potentially put upward pressure on interest rates.”
Some of Trump’s policies could boost economic growth, said Chang. But the risk of reigniting inflation also brought the probability of Federal Reserve rate reductions into question. According to FedWatch, the probability of the overnight rate dropping to 3.5% or lower by June 2025 has dropped from 68% to 15% over the past month. It is now a widely held belief that interest rates will not fall as far or as fast as most investors were anticipating, although there doesn’t seem to be any consensus that rates will go up substantively as a byproduct of the election, said Chang.
“We don't know which policies will be enacted, how fast they'll be enacted, or how aggressively they'll be enacted, and until we have more insights, lenders and investors will likely remain a bit more cautious at this point,” said Chang.
The long-term space demand drivers for most types of CRE remain sound, he said.
“We still have a housing shortage. The affordability gap between renting and making a house payment is still exceptionally wide and that will sustain rental housing demand,” said Chang. “Debt payments as a percentage of disposable income are still comparatively low by historical standards, and total savings, including money market mutual funds, is still up by $4.3 trillion on an inflation-adjusted basis compared to before the pandemic. That suggests US consumers remain in a good position to drive consumption.”