Q: How do you see the US election affecting the multifamily space?
A: Obviously, this depends on the outcome of the election. I think President Donald Trump’s re-election would probably leave things relatively status quo, and I would not expect any massive market movements in the short term.
I think the biggest risk to the overall real estate market, not just the multifamily market, would be a win by Democratic presidential nominee Joe Biden, coupled with the Democrats taking majority control of the Senate. In my view, that combination brings Biden’s proposed tax law changes front and center.
If he wins the presidential election, Biden has indicated in campaign proposals he will get rid of two of the mainstays of commercial real estate taxation: the 1031 exchange,1 as well as the stepped-up basis on the passing of an asset. I do not think this has any direct impact on the performance of multifamily assets. However, I do think it will have a meaningful impact on transactional volume as well as valuations.
Q: The valuation aspect certainly gets the attention of an investor in the multifamily space. Are there certain property types, regions or market types that would likely be more affected than others?
A: I do not think a tax change could incrementally hurt a specific geographic asset or asset class more than another. The pain should be felt relatively uniformly over geography as well as asset class. I would not expect one to materially outperform or underperform the other just as a result of election outcomes in the short term; how each president impacts the longer-term economy, however, will play a role.
Q: If we remain with a Republican Senate and president, what are some of the things that might be lurking in the policies that would have a positive or negative effect on the multifamily space?
A: I’m not aware of any meaningful policy changes. If we were to keep a Republican administration in the White House and a Republican-controlled Senate, I think they would mostly maintain the status quo. Hopefully, we would be getting to pre-COVID-19 status quo in a post-COVID-19 world, which I suspect means very low interest rates for a while, a strong economy that recovers and solid performance at multifamily assets across the country.
Q: If Biden wins the presidential election and the Democrats take control of the Senate, is it just multifamily that will feel some repercussions, or is it all commercial real estate?
A: I do not think there is a bifurcation between asset classes within commercial real estate as it relates to the presidential outcome. I believe Biden and the Democrats are potentially going to have meaningful tax law changes that directly impact commercial real estate across the board, whereas Republicans are not as likely to make changes.
There are really two parts to the question; what are the tax consequences, and what are the longer-term economic consequences? Commercial real estate is incredibly tethered to the overall economy. Whose path is the best for economic prosperity, Biden’s or Trump’s? I’m not going to give my opinion, but that’s really what it comes down to, which path would give us good gross domestic product growth and good employment numbers. I think Biden has made it clear that, if he is elected president, there would be a much higher tax bracket for high-income earners. So, what impact will that have on the overall economy? He’s going to provide tax breaks to the lower- and middle-income families across the country. Does that tax break result in multifamily becoming more affordable because homes have more disposable income? You just have to pick which side you believe would be the longer-term solution to those points.
Q: As a final question, because COVID-19 is front and center in the election, what effect do you think the pandemic has had on the attractiveness of investments into multifamily?
A: I think many investors consider multifamily to be the safest and most predictable asset class within the commercial real estate sector. I think COVID-19 has simply put a lot of exclamation points behind that statement.
If you look at the negative impact of the pandemic on hospitality, retail, office and multifamily, multifamily pales in comparison to what the other asset classes are suffering right now. What we have seen as a result of COVID-19 is a positioning of multifamily as a safe and predictable asset class—arguably the safest and most predictable—within the commercial real estate sector and as a result of that, we believe it’s going to attract more capital.
So, suppose capital sources have a certain allocation to overall commercial real estate. In that case, I think within that allocation over the course of the next few years, you’re going to see both institutional investors and private investors heavily skewed toward multifamily. I think the demand for multifamily is likely to go up and, as a result, I think capitalization (cap) rates—taking interest rates out of the equation—should go down.2
In my view, as long as interest rates stay where they are today, we’ll continue to see some sort of cap rate compression across the multifamily sector. Obviously, as you go down the quality curve in the multifamily sector, you’ll see cap rates increase. Still, overall, I believe multifamily cap rates should be declining in comparison to other commercial real estate assets, which are likely going the other way to mitigate uncertainty in those asset classes.
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1. A 1031 exchange swaps one investment property for another and allows capital gains taxes to be deferred.
2. The capitalization (cap) rate is used as a measure to indicate the rate of return that is expected to be generated on a real estate investment property.