The Election Effect Brings Uncertainty For Commercial Real Estate
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As we begin a new year, we all have a lot to be thankful for from an economic perspective. The global economy has improved, US GDP growth is still running strong, our unemployment rate remains low, wage growth is strong, US/China trade tensions have eased, and the United States-Mexico-Canada Agreement (USMCA), a replacement for the aging North American Free Trade Agreement (NAFTA) is expected to be finalized soon. And just for good measure, interest rates are still low, the equities markets hit an all-time high again in December and the yield curve is no longer inverted. Sounds pretty good, right?
With all that good news, why all this talk about uncertainty? Why all the hand-wringing and the what-if games that we hear played in the media each day? Each of us gauges the level of danger or opportunity of any event with our own personal slant. Often, our first response is to become uncertain and uncertainty changes our decision-making thought process in a way that could change how we ultimately react to a challenge, problem or opportunity.
On November 6th, we go to the polls to decide on some very big issues at both the federal and state levels. The main act is, of course, deciding who will be sworn in as President on January 20th of 2021. Will we stick with the status quo or do we take a chance on a candidate who wants to take the country in another direction? Those of us who exercise our right to vote will be making that decision for everyone, and given the polarized nature of our political scene these the decision is going to have major consequences no matter who is elected.
We have experience in assisting with real estate decisions in election years, and we have seen a tendency for space occupiers to take more of a wait-and-see attitude in the run-up to an election. Given the attention this election is sure to keep getting up until the big day, we believe that this tendency will be a big factor in terms of getting office deals completed in 2020. That could mean more requests for short term renewals from tenants with near term lease expirations. Some office building owners may be forced to go along to get along with their existing tenants, hoping that greater levels of certainty after the election will make them more willing to ink longer deals.
Tenants who don’t need to make a relocation decision before November may stay on the sidelines and that will increase time on the market for existing vacancies. Therefore, property owners may be well advised to reach a little more in negotiations to secure long term commitments that will take them well beyond the election horizon. Getting deals done before the election will serve as a hedge against an election result that goes against the status quo, as tenants would be more likely to take additional time to assess the policies of a new president before making long term lease commitments.
Another significant cause for uncertainty comes in the form of the California Schools and Local Communities Funding Act. This ballot initiative, if passed, would strip most commercial property in California from the protection of Proposition 13 and allow for a reassessment to full cash value every 3 years. Currently, the base property tax levy is set at 1% of the market value, as determined at the point of acquisition, and that levy cannot be raised by more than 2% in any given tax year. The initiative is backed by powerful public employee unions and a variety of other organizations that have committed major funding to encourage voters to pass it. Various business and trade organizations are lined up against it and are just as committed to their goal of defeating what would be the first major change to Proposition 13, which has been the law in California for 41 years. The negative impact on property values could be catastrophic for property owners if it contributes to a rise in cap rates, but also to tenants who bear all or a portion of the property taxes on the space they lease. Signatures are being collected now for a revised version of the proposition, which, in its original form was not polling well and lacked properly funded sponsors. That process is expected to be successful and we will likely be voting on the issue in November. If it were to pass, the negative impact on property values could be substantial.
This may be a good time to take a hard look at what impacts your own level of uncertainty and ask yourself how it may be impacting your daily decision making. The Kelemen Company stands ready to assist you in that effort. Just give us a call and our team can answer your questions and discuss your specific commercial and asset needs – no strings attached. Call (949)668-1110 or contact us today to schedule your consultation!
