The Impact of the 2012 Elections on the Real Estate Industry
According to the Building Owners and Managers Association (BOMA), the office building industry contributes over $200 billion a year to the US. economy. BOMA estimates that office building operations alone support more than three million jobs. The nation's $2.9 trillion real estate sector had much riding on the elections, with President Obama and challenger Mitt Romney each embracing differing policies with potentially significant impact on the real estate industry. While election cycle formulations often fail to secure enthusiastic execution after re-election, now that the people have given President Obama another term in office, we can begin to assess the policies he may espouse in his second term that could impact the real estate industry. In New Jersey and much of the country, the commercial real estate industry has been hampered by a lack of job growth, tight financial markets and high vacancy rates. In New Jersey, the first decade of this century was a time of sub-optimal employment growth, with the state ending the decade with almost 100,000 fewer private sector jobs than when it started. The state’s lackluster economic performance over the past twelve years, has contributed to a stagnant real estate market. In the period from 2002 to 2012 the state experienced either negligible positive absorption or negative absorption of office space. And vacancy rates for all classes of office space have remained stuck within a high range of between 17% and 21%. Similarly, from 2000 through the present, Direct Weighted Average Gross Asking Rental Rates for all classes of office product has remained within a range of $21 and $31 a square foot.
An issue of great interest to the real estate industry is the tax treatment of capital gains. The current capital gains tax rate is 15 percent. President Obama has expressed support for the “Buffett rule”, which would assess a 30 percent tax on capital gains for people making more than $1 million per year. Governor Romney’s position was to maintain the 15% rate with complete exemptions on capital gains, dividends and interest income given to those making less than $200,000 annually.Another policy initiative that could impact commercial real estate involves financial regulation. President Obama was a champion of the Dodd-Frank Act and considers it a cornerstone of his first term. It imposes tighter regulatory controls and potentially increased costs on banks, as well as more oversight and supervision for the nation's largest institutions. Governor Romney had vowed to repeal Dodd-Frank believing that it unduly burdened the economy. Instead, he advocated higher capital requirements and leverage limitations to promote stability in the financial markets. Commercial real estate loans differ from their residential-loan counterparts. With residential loans, the debt is amortized over a set period of time – usually 20 or 30 years. Commercial mortgages are usually underwritten for five, seven or 10 years (five years being most common), amortized as if they were a longer term loan with big “balloon” payments due at the end. At that point, the property owner usually refinances the debt. A borrower’s inability to refinance could force it to default. Financial regulation under Dodd-Frank may impact the $300 billion in commercial real estate loans being re-financed in 2012 as well as the $2.4 trillion maturing by 2018.While issues impacting residential real estate may seem unrelated to the commercial real estate industry, multi-family housing is an important sector for real estate investment groups. Whether the federal tax deduction for mortgage interest will be changed or eliminated could have a significant impact on the real estate industry. Currently, homeowners may deduct the interest on mortgage loans for primary and secondary residences up to $1 million of mortgage debt. Interest on home equity loans up to $100,000 may also be deducted. The mortgage interest deduction provides about $90 billion in tax savings to homeowners each year and has enabled homeownership in the U.S. since 1913. President Obama has expressed an interest in limiting or eliminating this deduction.
The role of the federal government in the secondary mortgage market will also impact investments in for-sale housing. Since the 1990s, Fannie Mae and Freddie Mac (historically privately owned but sponsored by the federal government) have backed more than 90 percent of the home mortgages originated in the U.S. making home mortgages more accessible and affordable to millions of Americans. Due to Fannie Mae and Freddie Mac’s investments in subprime loans and other risky home mortgage loans, they experienced financial difficulties necessitating a government bailout of $360 billion and a U.S. Treasury Department take over. Both President Obama and Governor Mitt Romney proposed restructuring Fannie Mae and Freddie Mac. President Obama will consider replacing the two entities with a system that shifts more insurance responsibilities to private companies and limits the federal government’s involvement to a backstop role providing disaster-relief insurance only in the event that the private guarantors become insolvent. A more limited role by the federal government in the secondary mortgage market, as proposed by the President, may lead to shorter-term mortgages, (e.g., the elimination of 25- and 30-year mortgages) higher interest rates and possibly higher down-payment requirements. With Congress enjoying a Republican majority and the Senate a Democratic majority, President Obama will contend with divided government for at least two more years. This may be a good thing for the nation’s corporate real estate industry because policies that could have a dramatic impact on it will need to survive the scrutiny of two parties and two vigilant legislative bodies.