Cushman & Wakefield | U.S. Midterm Elections and Policy Impacts on CRE

Key Takeaways

• Midterm elections rarely dictate a clear shift in the fiscal policy landscape, and the 2022 elections are no different.
• Fiscal policy has been expansionary during the recent period of unified political leadership. A divided government would likely thwart major legislative agendas from either side of the aisle.
• The health of the U.S. economy will be far more pivotal for commercial real estate over the next couple of years. The Federal Reserve has a bigger say in its trajectory than Capitol Hill.
• Historically, gridlock has been good for stocks and property. Based on election prediction models, divided government is the most likely outcome.
• Commercial real estate is intensely local by nature. State and local elections may have a greater impact on property dynamics in certain markets.

Fiscal policy can have a variety of impacts on commercial real estate performance, in the context of its implications for economic growth, investor confidence, and its implications for real estate policy (e.g., taxes, 1031 exchange, carried interest). In this regard, elections matter for CRE—but only to the extent that we can draw a straight line from political outcomes to changes in actual policy. While wide-sweeping changes in electoral leadership can offer hints as to how the legislative agenda might evolve, this type of seismic shift rarely occurs during midterm elections. That said, there are midterm election scenarios that will be more impactful on the property markets than others, and there will be state and local elections that will be more impactful on local supply/demand fundamentals than others. But at the national level, the greatest impact to property will not come from fiscal policy, but from monetary policy and the Federal Reserve’s ability to successfully recalibrate interest rates without causing too much damage to the broader economy.  In other words, the elections on November 8 will be important—but ultimately, it’s the economy.

What’s at stake in the 2022 elections

Voters take to the polls on November 8 to elect local politicians to the U.S. House of Representatives and the Senate. Given that the presidency will remain in the hands of Democrats for another two years, there are essentially two outcomes at stake:

Divided government (Republicans gain House, Senate or both): Republicans need to pick up five seats (out of 435) to take leadership in the House. History is on their side: the party out of power has gained seats in 17 of 19 midterm elections since World War II, with an average gain of 27 House seats. Election prediction models similarly assign a high probability to Republican victory. In the Senate, Republicans need to gain just one seat (out of 35 races) to take control. While a seemingly easy hurdle, the Senate seats at stake this cycle are closely contested; prediction models view Senate control as a toss-up. Whether Republicans take control of either one or both chambers of Congress is not likely to tilt national policy significantly one way or the other, since President Biden would likely oppose signing any legislation lacking bipartisan support.

Unified government (Democratic sweep of Congress): This is the lower likelihood scenario, according to polls and election models. However, it is the only outcome that could potentially clear a path for more significant legislation that could impact the outlook. The last two years of unified government control allowed Democrats to enact policies geared toward pandemic assistance, climate resiliency, infrastructure funding and student loan relief, among other policies. Democratic control of Congress may encourage the pursuit of expanding these policies, but even this result would require more information on the legitimate policy proposals before we alter our views on the outlook.

Economics Outweigh Politics

The economy is always among the top issues for voters, but perhaps more so in 2022 than any time in recent memory. A survey conducted by Pew research finds that 79% of registered voters say the economy will be “very important” in their voting decisions during these midterms, more than any other policy issue. What this means for election outcomes is less clear, and indeed less important for commercial real estate, than the fact that economic growth is slowing, and recession fears are mounting.

It is no surprise that the economy is a top consideration. Various measures of consumer sentiment indicate that Americans are decidedly pessimistic about their personal financial situations and the future, with inflation being the chief concern. There is ongoing debate that policymakers could do more to address the supply side of the inflation problem (e.g., incentives to boost housing supply, skills mismatch programs to address labor supply, support for domestic production) but even if policy is legislated, it would take time to be effective. In the near term, the burden of fighting inflation falls more so on the apolitical Federal Reserve, which will continue raising interest rates to cool demand and allow supply chains to recalibrate. We do not expect the Fed to pivot anytime soon, and so the impact of higher rates will continue to percolate through CRE capital markets through higher borrowing costs and pricing uncertainty.

Time will tell whether the U.S. enters a recession, but it is looking more likely than not. Increasingly the question is becoming, not whether we go into recession but how severe will it be. In the past two recessions (global financial crisis of 2007-2009 and the pandemic), politicians displayed varying degrees of bipartisan support to mitigate the economic strain on their constituents. This time may be different. Under a mild recession scenario (the Cushman & Wakefield baseline), political willpower to provide fiscal support would likely be muted for three reasons: 1) Labor markets are healthy, and we are unlikely to see a severe spike in unemployment; 2) U.S. government debt/GDP ratio has doubled since 2007; 3) Higher interest rates raise the costs of fiscal policy.

All things equal, the premise that we expect a period of political gridlock is not necessarily a bad sign for the economy or asset prices. In periods of divided government dating back to World War II, GDP growth averaged an above-trend rate of 2.7% annually, while equities yielded 7.9%. In the immediate period following midterm elections, stock prices tended to rise as investors gained more clarity on the policy front. Median equity market returns in the first three quarters of midterm election years were -1%, 2% and 5%, respectively, but fourth-quarter returns jumped to 8%.

Similar trends hold for private commercial real estate returns. Dating back to 1979, annual returns for all property types in the two years following midterms averaged 9.4% compared to 8.8% in the two years preceding them. However, this does not imply a causal relationship as averages can be misleading without proper economic context. For instance, the two years preceding the 2010 midterms was the worst period for CRE returns on record amid the global financial crisis of 2007-2009, thus dragging down the average. By the same token, the two years leading up to the 2022 midterms have seen the industrial and multifamily sectors experience returns well above the historical average. In other words, the economy and property market fundamentals matter much more than election cycles.

Local Elections Matter

National elections in the House and Senate will get much of the media attention on November 8, but CRE stakeholders know that state and local elections can be equally, if not more impactful on local market trends. In 2022, there are 36 gubernatorial races with implications for how states will address crucial policy topics such as affordable housing, tax rates, infrastructure projects and more. Many states have accumulated a windfall in cash following federal stimulus assistance and strong revenues during the pandemic years, so there may be more willingness to enact policy changes compared to the federal stalemate. For example, in 2021, 29 states and the District of Columbia enacted some form of tax cut.

Elected officials are not the only ones who will dictate policy changes. In California and Massachusetts, for example, tax increases for wealthy individuals are on the ballot, which could potentially impact migration and demographic patterns in these states going forward. Voters around the country will also weigh in on a host of social issues—including immigration, affordable housing, environmental regulation, abortion, minimum wages, medical marijuana, and many others—which have the potential to sway property markets either directly or indirectly. We do not attempt to make any predictions about which measures will win out, but CRE stakeholders should be aware of how local measures stand to change the market landscape from a policy perspective, as these issues are likely to have a more sizable impact than anything that happens on the federal level in the next couple years.

Compliments of Cushman & Wakefield – a member of the EACCNY.