Now that the votes have been tallied, the questions begin.
Who will be selected for the next Cabinet? How will Washington’s priorities shift? How will a Trump presidency change policies that affect commercial real estate markets and investments?
It’s still much too early to know definitively what the next four years will bring. But we can look at the policies under which Trump ran, as well as the market fluctuations this week, to get a sense of what a Trump presidency may mean for commercial real estate.
First, What Changes Does Real Estate Normally See after an Election?
Presidential elections don’t necessarily impact real estate directly, but can impact the market through general economic shifts. According to Eric Wohl, EVP at Hanley Investment Group:
“Every presidential election creates new uncertainty about the direction of the economy. The goal is to have a clear picture on how each presidential nominee, if elected, will impact the commercial real estate industry. While some policy details may be vague or change, all we can do is to interpret the provided information at this time to the best of our ability.”
In order to predict how volatile the market might become, experts looked at Trump’s policies on tax reform and capital gains.
What Tax Reforms Does Trump Propose?
According to his campaign website, Trump proposes to reduce the number of tax brackets from seven to three and cut the top marginal income tax rate from 39.6% to 33%. This would be paired with a double-digit decrease on the business tax rate from 35% to 15%.
The new lower rate would apply to “pass-through entities,” which pay no tax at the business level at all. While they can be found across all sectors of the economy (Tax Foundation estimates that they account for 60% of all business income in the US), pass-through entities are especially prevalent in real estate. Under that structure, income is taxed at individual rates when it is distributed to company owners.
With a business rate lower than the current capital gains rate of 20% on profits from the sale of assets, Trump’s proposed policies concern even Republican tax experts. Before the election, New York Times quoted Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group:
“If you want to create a recipe for an abusive tax shelter, take those elements and bake for 15 minutes. It’s a phenomenal benefit for housing and commercial real estate interests.”
All together, Trump’s tax policies could remove more than $1 trillion in tax revenue over 10 years, much of which would be in savings for real estate investors.
How has the Market Already Responded to News of a Trump Presidency?
Tuesday’s election results quickly reverberated through the stock market, mortgage securities, and the energy, healthcare, and manufacturing sectors.
While those initial shocks have settled into a low rumble for now, there’s no question that companies are concerned about what the next four years may bring. On the one hand are promises of lighter regulations, lower taxes, and higher spending on domestic infrastructure. On the other, American businesses are bracing for revamped environmental and trade pacts, as well as a potential crackdown on global operations. Those concerns saw a sharp jump in stocks for drugmakers, coal miners, and military equipment makers. In contrast, green energy and other industries saw sharp declines.
For the moment, all eyes are on the Fed. While we still have several months to see how Trump’s policies ultimately impact business sectors across the economy, a Federal Reserve rate increase has been projected for some time. According to NBC News:
Trump has pledged to tear up or renegotiate international trade agreements, which could set off a wave of protectionism, threatening to stall a tentative global economic recovery. His economic plans call for massive tax cuts that many economists estimate would sharply boost the US budget deficit.
“It raises the odds that the Fed will not move in December,” said Mark Zandi, chief economist of Moody’s Analytics, of Trump’s victory on Tuesday.
What Does All this Mean for Commercial Real Estate in WNC?
Theoretically, lower business tax rates and a cap on capital gains are designed to encourage additional commercial investments among the big players in the economy. However, should these policies take effect as proposed, it’s unclear how they would directly benefit smaller investors, commercial real estate across small metropolitan areas (like WNC), and the businesses housed in new developments.
Unfortunately, we will have to wait to see how commercial real estate shifts in response to the incoming administration.
Whatever direction the dial turns, you can count on NAI Beverly-Hanks to help you make confident commercial real estate decisions. Contact us today to speak with an NAI Beverly-Hanks real estate agent about commercial property investments in Western North Carolina.