On November 3rd, 2020, millions of Americans voted in what was billed by many as “the most important presidential election of our lifetime.” The election year turnout broke historic records and, after an extended period of uncertainty and several recounts, Joe Biden appears poised to emerge victorious over Donald Trump to become the next president of the United States.
Mr. Biden’s ascent to the presidency will occur amidst a period of tremendous economic turmoil and an unrelenting pandemic. It also represents a stark contrast in economic policy from the current administration, which has led some to question how the transition will impact commercial real estate (CRE) markets. While there is bound to be a few surprises, we believe that there are 6 reasons why the upcoming presidential transition doesn’t matter for the near term future of commercial real estate assets.
Reason #1: Interest Rates will Remain Low
The economic fallout from the Covid-19 pandemic has been swift and severe. As a result, the Federal Reserve has taken aggressive action to inject significant amounts of stimulus into financial markets in the form of low interest rates. The “Federal Funds Rate” is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Between February and April of 2020, the Federal Reserve lowered this key rate from ~1.5% to nearly 0% in an attempt to spur economic activity. Further, in their September 2020 policy statement, they stated that “the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.” According to many economic forecasts, this period of extended low interest rates could last well into 2023.
Low interest rates are a net positive for real estate investors and we believe that this policy stance will remain unchanged regardless of the change in leadership.
Reason #2: Additional Stimulus is Likely
In March of 2020, the United States Congress passed an unprecedented $2 Trillion economic stimulus package aimed at delivering cash payments to citizens and propping up small businesses impacted by the coronavirus pandemic. Many economists have credited this action with preventing a full blown economic collapse, but it likely didn’t go far enough. As of the writing of this article, the Democrat controlled Congress, Republican controlled Senate, and White House are in negotiations for an additional relief package of ~$800 billion aimed directly at small businesses. We believe that a deal will get done and that the resulting incentives will help these businesses continue to make their rent payments, which is a positive for the commercial real estate industry, regardless of who is president.
Reason #3: Continued Quantitative Easing
Although somewhat controversial, Quantitative Easing (QE) is a monetary policy in which government bonds or other financial assets are purchased directly by the central bank as a way to inject money into the economy. Traditionally, this practice has served to stabilize financial and real estate markets and we believe that it will continue as an additional stimulus measure, regardless of who is president.
Reason #4: Inflation Tolerance
Historically, the Federal Reserve has used the Fed Funds rate as a tool for fighting inflation. If the economy got too hot, they would raise interest rates to slow it down or if it was struggling, they would cut rates to encourage activity. Either way, one of the goals of this policy is to reduce or eliminate inflation, which is the rise in prices associated with strong economic activity. However, this policy has changed as a result of pandemic induced economic malaise.
In August/September 2020, the Federal Reserve made a significant change in its inflation policy. Instead of increasing interest rates to head off inflation before it hits, the Fed now will wait to hike rates until it sees inflation running persistently above the 2% target for an indeterminate period. In other words, they will let the economy heat up and stay hot for a period of time – causing inflation – until they raise interest rates. This is a historic first and we believe that this policy is a positive for commercial real estate valuations and that it will remain in effect, regardless of who is president.
Reason #5: Pent Up Demand
2020 has been a year like no other in United States history. From the pandemic to the race riots and historic job loss, consumers have been very skittish when it comes to discretionary expenditures. By some estimates, consumers are sitting on $2.5 trillion in savings that could ignite a “growth bomb” when the dust from the pandemic settles. We believe that there is significant pent up demand for food, travel, and other entertainment options and that this is a major positive for real estate investment, regardless of who is president.
Reason #6: Scarcity
The supply and demand characteristics of certain real estate assets like residential housing and multifamily are such that, regardless of who is president, there will continue to be a scarcity of the most in demand asset classes driving prices higher over time.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
We follow macroeconomic trends closely and use these insights to drive our investment decisions and CRE market selection. If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.