Mark's Market Musings

Hi there! I hope you are having a great start to the new year. Below you will find the first edition of my Market Musings. Because we continue to be unable to visit in person, I thought it might be nice to connect virtually and share some interesting stories, comments and perspectives that I’m seeing in the national and local real estate markets. Hopefully you will find them useful, thought-provoking and/or humorous.

Of course, you may not. If you aren't interested in getting these from me, please shoot me an email or click unsubscribe below. If you have feedback or ideas, I'd like to hear those, too!

Thanks, Mark

When the start of a new year coincides with the inauguration of a new U.S. president, commercial real estate investors often consider how the new administration will affect their industry and, as a result, how those individuals should change their investment plans in the upcoming year. President Joseph Biden brings a significantly different approach to the White House, the effects of which are certain to trickle down to regional and local real estate markets. And with the Democrats also taking control of Congress, Biden sees to benefit from greater support for his initiatives from the Legislature than his predecessor, Donald Trump. So, what should commercial real estate investors expect for their industry this year, and the next four years? Obviously, time will tell, but there are a number of issues that Biden has flagged as priorities that commercial real estate investors should consider in connection with planning their prospective investments.

COVID-19

The unquestioned first priority for the Biden administration will be solving the COVID-19 health crisis. While these efforts are not expected to have a significant impact on the real estate sector (a national mask mandate shouldn’t affect real estate businesses’ ability to operate), a new stimulus package could drive investment in the multifamily and retail sectors as Congress works to help these industries survive. Whether this package includes direct payments or tax incentives, these subsectors of the real estate industry could see increased opportunities for investment in the near term.

Policy Changes

While the prospect of a stimulus package should be enticing to real estate investors, several policy goals of the Biden administration could pose threats to the commercial real estate sector. Perhaps most menacing is Biden’s suggestion of eliminating the 1031 exchange (or limiting its application to investors with less than $400,000 in income), which could result in a significant reduction in capital available for deployment. Similarly, given early reports questioning the effectiveness of the Opportunity Zone tax incentive, Biden has hinted that additional restrictions and reporting obligations may be needed to ensure that the incentive actually results in improvements to these areas, increasing transaction costs for these investments. Environmental policy will also be a focus for Biden, which could result in the requirement of new, costly upgrades in older buildings. Finally, as is becoming increasingly typical for Democratic presidents, Biden has floated the idea of raising the capital gains tax rate to pay for his policy changes, which could further stymie real estate investment. On the bright side, Biden has urged removing the 2017 limit on SALT (State and Local Taxes) deductions, which could offer critical tax savings for residents and investors in California and similar high tax states. Notably, these policies should take longer to enact while the country continues to grapple with the effects of COVID-19.

Leadership Certainty

For better or worse, Donald Trump was elected because of his reputation as a disruptor, often causing consternation to Republican and Democratic party leaders alike. Biden, on the other hand, is seen as an establishment president whose priorities and initiatives will be more easily predicted and reliable. Regardless of political party affiliation, this certainty should give investors comfort that their long-term investments are unlikely to be threatened by unforeseen policy changes from Washington.

Positive Outlook

A recent study by the Newmark Group analyzed returns in the commercial real estate industry under the presidential administrations and found that over the last 40 years, annualized total commercial real estate returns across all asset classes have averaged 9% during the years when a Democratic president was in office (16 years) and 8.2% when a Republican was in office (24 years). While a multitude of external factors have likely driven these results, here’s to hoping this trend continues and the commercial real estate sector sees significant positive growth in 2021 and beyond!

Local Beat:

News from the Sacramento Commercial Real Estate Market

New retail tenants could be on the way for Capitol Mall:

City of Sacramento pushes forward on zoning change that could lead to increased residential density within City: Read more

City calls off Project Homekey homeless housing project in River District: Read more

Off the Wall:

Funny or Interesting Stories Featuring Legal Real Estate Issues

Those famous red shoes suffer a legal setback!

Summary: Read more

Full Decision: Read more

We’ve heard of landlords turning off utilities for defaulted tenants, but can a City do so? Read more