5 Things You Need to Know: Post-Election Commercial Real Estate Outlook

Is it vibes or should CRE investors pop the champagne

The Real Estate Developer in Chief is headed for a second term, and many across the commercial estate world are giddy at the possibilities.

“We're gonna be paying down debt.” - Donald Trump, November 6, 2024

But is it just vibes, or does real estate stand to benefit from Donald Trump’s second go at reshaping the United States in his vision?

1) Will Long-Term Rates Continue to Defy the Fed?

While the president doesn't technically set interest rates policy, many observers took the rise in rates after the Federal Reserve’s September rate cut as markets preparing for a Trump economy.

And as American life becomes increasingly financialized, real estate investing is now as much financial engineering as it is operating a physical thing.

When markets hear about tariffs, tax cuts, efficiency and other things that smell inflationary, investors demand a higher return to hold long-dated bonds.

Which would point towards higher rates for longer than most expect.

The flip side is that higher rates are already blowing a hole in bank balance sheets, which makes it all the more puzzling that bank stocks ripped the day after the election (see #3 below).

Higher rates make low-yielding assets held by banks worth less, and by some accounts unrealized losses are approaching $1 trillion.

Trump more than any other president should understand these dynamics, and perhaps a nugget of optimism was hidden in his acceptance speech:

“We're gonna be paying down debt.”

If (and that’s a big if), Trump and his team can deliver on this promise, it could assuage concerns that the US is headed for a fiscal disaster, and maybe (maybe) be willing to accept a lower rate of return to making that bet.

2) Yeah, but I thought we licked inflation?

Despite unprecedented rate hikes, inflation has remained stubbornly higher than the Federal Reserve would like.

And as many have pointed out, Trump’s protectionist instincts and promises of tariffs have brought inflation concerns back to the fore (see #1 above).

While inflation may be good for rents, tariffs stand to jack up material costs just when construction costs were starting to roll over.

This could exacerbate the high cost of housing, continue to keep new projects from coming out of the ground, and generally add to the dramatic shortage in apartments and homes we are seeing around the country.

3) Deregulationmania

As I mentioned above, bank and Wall Street stocks absolutely ripped on the day after the election:

JP Morgan Chase (NYSE: JPM) +11.7%
Bank of America (NYSE: BAC) +8.4%
Wells Fargo (NYSE: WFC) +9.9%
Citigroup (NYSE: C) +8.8%
Goldman Sachs (NYSE: GS) +10.4%

On the one hand, this makes sense: a steepening yield curve (lower shorter rates and higher longer term rates) means more lending margin for banks. And with Trump generally a de-regulation president, banks could enjoy looser rules and a more profit-friendly stance from Washington.

But I continue to wonder how this dynamic plays out if rates remain elevated, given the aforementioned unrealized losses still buried in plain sight on bank balance sheets.

More risk-on banks is good news for real estate investors, who have seen lenders clamp down in the past couple years making buying and refinancing more challenging than it’s been since the GFC.

Also encouraging for property investors is that tax-deferred 1031 exchanges and carried interest are likely both safe for the time being, especially with a Republican-controlled Congress.

4) And what about that wall?

Perhaps Trump’s signature policy position, immigration, could have a dramatic impact on housing markets - particularly in the southwest (including Texas).

As I wrote in January, its possible that four million border crossings impacted the housing market. And by the power of the transitive property, a border crackdown would likely have the opposite impact.

Very much apart from what one may believe about immigration as a policy position, anyone in the real estate business has to be aware of changes in the flow of human capital across our borders.

5) Blah blah blah, let’s get on to the fun stuff already

This is Donald Trump after all, so the only thing we can really expect from the next four years is the unexpected.

Or perhaps better said, the hinted at and wow what if he really does it.

Privatization of Fannie Mae and Freddie Mac

In his previous term as president, Trump floated a plan to privatize the GSEs but couldn't close the deal. And there have been reports that his team is once again working on these plans.

The GSEs have so dominated the residential and multifamily lending markets for the generations, that breaking them apart would be a major disruption to lending markets. Without the details of a plan (or even the concept of a plan), it’s hard to know what the fallout would be, but for a president now in pure legacy-building mode, I wouldn’t bet against this.

Expanded Opportunity Zones

The Trump Administration enacted the Tax Cuts and Jobs Act in 2017, which among other things created hundreds of Opportunity Zones (OZs), designated areas where certain real estate projects could quality for favorable tax treatment.

OZs have undoubtedly brought new investment to areas not typically on the radar screen of real estate investors.

And while there has been grumbling about gentrification and a lack of accountability on project impacts, it wouldn't be a surprise if Trump doubled down on one of his more effective policies.

Relocation of Federal Agencies

According to the Bisnow, there is talk that Trump may relocate certain federal agencies away from Washington DC.

And if the much hyped Department of Government Efficiency (DOGE) comes to pass, Elon Musk could make yet more enemies among owners of DC office properties - which are already under tremendous pressure post-Covid.

Make 100% Bonus Depreciation Great Again

As part of the 2017 tax cuts mentioned above, Trump allowed investors to immediately depreciate the cost of the investment into certain business assets, known as “bonus depreciation.”

And while the bonus phased out over time, it’s safe bet he may reach into the playbook for this trick as soon as he reasonably can.

In conclusion, commercial real estate investors have reasons to be excited. After all, the new president is a real estate developer!

But a single election cannot wipe out looming deficits decades in the making, which can push around markets far more than a single person - now matter how outsized the ego.