Although President-elect Joe Biden has not yet released a comprehensive plan for commercial real estate, he has made other proposals that do contain relevant provisions for the industry. Undoubtedly, the speed and strategy behind his response to the COVID-19 pandemic will likely be a political driving force.
Control of the U.S. Senate and President-elect Biden’s ability to deliver on his priorities will depend on the results of two Senate runoff races in Georgia on January 5, 2021. Should Republicans retain control of the Senate, Biden’s ability to enact his program would be constrained.
A key outstanding issue is the amount of additional fiscal stimulus that will be enacted to support the economy. We expect a relief package of less than $2 trillion under a Republican-controlled Senate. The amount of stimulus could be higher and implemented in one or two phases if the Democrats gain the Senate majority.
Full Democrat control of the executive and legislative branches would also likely mean major changes to trade policy, taxation, discretionary spending, housing, education, health care, environmental regulation, and broader regulatory policy. All of these would have implications for commercial real estate.
Biden has laid out detailed plans for addressing the health and economic impacts of the virus, among other priorities. But he hasn’t released any specific plans for commercial real estate (CRE) yet, but some of his proposals contain relevant provisions for space and can give an idea of the potential industry impacts, explained Emily Piech, a senior government relations associate for JPMorgan Chase. Piech described what some of the new administration’s CRE-related priorities may be.
Potential Changes for Commercial Real Estate
According to Piech, Biden may fund some of his plans by eliminating 1031 like-kind exchanges for investors with an overall annual income of more than $400,000. A 1031 exchange allows individual investors to defer capital gains tax, thus freeing more capital for investment in the replacement property.
The new administration may also make changes to opportunity zones. Changes may include requiring investors to provide detailed reporting or public disclosures on the impact of opportunity zone investments. The administration’s Treasury Department may also put stricter requirements around the definition of an opportunity zone. These changes would not require congressional approval.
Other policies that could impact the commercial real estate market may include:
- Making the first-time homebuyer tax credit permanent or creating a down payment tax credit;
- Expanding Section 8 housing tax credits;
- Establishing an affordable housing fund.
Raising Revenue and Increasing Oversight
Many of the new administration’s plans would require revenue to be raised, which presents the risk of tax increases. This could include increasing corporate and income taxes on the highest earners. State and local governments may also seek to increase taxes to offset budget pressures.
Piech also expects the new administration to increase oversight of financial institutions, more strictly enforcing current regulations and targeting bad actors, especially those involved in COVID-19 scams.
The new administration is expected to quickly appoint new leadership to the Securities and Exchange Commission, Commodity Futures Trading Commission, and Consumer Financial Protection Bureau, so those agencies will likely be the first to change their regulatory approach.
There is also the potential for policies that could impact the biggest banks, such as increased capital requirements, additional disclosure requirements, or even a bank tax on the largest firms.
The Biden Agenda & Real Estate
Biden’s platform calls for $5.4 trillion in additional spending over 10 years. If enacted, expanded health insurance coverage likely will drive demand for medical space closer to the consumer and spur the conversion of some retail space. In addition, $1.6 trillion for infrastructure and R&D should benefit office and industrial real estate demand. Housing policy initiatives, such as tying federal funding to zoning changes to spur affordable housing development in suburban locales—as well as increasing affordable housing subsidies—could present unique opportunities for residential real estate.
Biden has called for nearly $3.4 trillion in additional revenue over 10 years. This would be primarily achieved by partially repealing the 2017 tax cuts and further increasing income tax rates on incomes over $400,000 per year, taxing capital gains as ordinary income for households with income over $1 million, additional payroll taxes, and higher taxes on corporations. If implemented, the tax law changes could lower consumer spending in the luxury retail segment and some areas of the housing market. The increase in corporate taxes may impact capital expenditures by businesses and wage and job growth, but this could be offset by a more stable global trade environment. If pursued vigorously, Biden’s environmental agenda would have implications for commercial building operating costs to meet higher energy efficiency standards.
The presidency and a Democratic Senate would enable Biden to enact large portions of his agenda. Most immediately, a larger federal stimulus package to support the economy would boost real estate demand in the near term. More aid to state and local governments could reduce pressure to raise taxes on real estate. However, the popular 1031 tax-free exchange program would be threatened and luxury retail, energy, finance, defense contractors, and tech could face headwinds from tax and spending policy changes and increased regulation.
If Republicans retain the Senate, the Biden agenda will be checked and have a more subdued effect on the broader economy and commercial real estate. A more limited fiscal stimulus package would be enacted, with less state aid and the prospect, at some point, of higher state and local real estate taxes. On the other hand, the 2017 personal and corporate tax cuts would remain in place. Like any president, Biden will also have the power to influence spending priorities and the regulatory environment and to enact trade policy. The potential for less trade friction, especially with U.S. allies, may be helpful as the economy pulls out of the pandemic-induced recession.
It is likely that nothing significantly or materially impacting the CRE industry in the immediate future, certainly not in 2021 as controlling and mitigating the pandemic will take all focus and energy, given the country’s expectations of this new administration. On the other hand, it is unlikely that this area will not be entirely left alone for the duration of this current administration.