On more than one occasion in recent months I’ve had conversations with real estate investors or lenders that have drifted into politics. “What do you think of the Tea Party?” “What do you make of Occupy Wall Street?” “What’s your impression of Congress?”
And then, usually what comes next is a comment along the lines of, “I’ve never seen anything like this before.”
The rise of the Tea Party and Occupy movements—neither of which have leaders and both of which include members with diverse, if not conflicting concerns—would be amusing if the stakes weren’t so high.
But the issue is that there are major problems that need to be addressed—regulatory reform, tax reform, deficit reduction—many of which will affect the economy more broadly and commercial real estate specifically.
And with the gap between the two parties, the uncertain outcome of the 2012 election and the rise in populist anger, nobody seems to know how any of it is going to shake out.
The net result of this is a high level of political uncertainty. Couple that with a still shaky economic recovery marked by anemic job creation, questions about capital markets and convulsions in Europe stemming from sovereign debt crises, and the picture isn’t exactly pretty.
The first half of 2011 was playing out nicely. Investment activity was up. Risk tolerance by lenders and investors was increasing. And the CMBS market was recovering nicely. But even then there were creeping questions. For instance, fundamentals were not reviving as quickly as expected—leading some to believe that the investment market was getting ahead of itself.
So we had a few reality check moments as the summer progressed, starting with the debt ceiling debate. Perhaps most significant was a step back in the reemergence of the CMBS sector, which is now ending the year with things having slowed down some.
Simultaneously, the industry did seem to start to take note that the jobs market remains pretty awful and that, overall, fundamentals still have a long way to go before they’re really healthy.
Investment activity has since slowed in the second half of the year. We’re still on pace to exceed the volume posted in 2010, but it’s not looking like 2011 will be the robust year it seemed to start out to be. Deals are taking place, but not as many as we expected. And the whole context in which deals are taking place has changed.
And now we have a big political mess to wrestle with.
From my perspective, the importance of the questions being posed by the political uncertainty is precisely that it could have some massive implications for commercial real estate investment.
The first issue is the potential change in the way carried interest is taxed, which would affect thousands (if not tens of thousands) of real estate partnerships.
Also at issue is the fact that huge sections of the Dodd-Frank Act have yet to be written. The broad strokes are there. But the details have not been filled in.
So, for example, there’s a notion that securitizers will be required to retain a slice of what they originate. But the form this will take hasn’t been determined. In the worst case scenario, if it’s too restrictive, there is a risk that no one will want to be in the securitization business at all. And given the level of commercial real estate debt that will continue to need to be refinanced in the coming years, that would be a disaster.
And, of course, there’s the ever-present question of what to do with Fannie Mae and Freddie Mac. The two behemoths still need to be reformed. There has not been a whole lot of movement with that. But whatever happens with these agancies will have implications for the multifamily sector.
In additon, there is the question of deficit reduction. The emergence of the Occupy movement—and its targeting of Wall Street and the nation’s wealthiest 1 percent—may introduce new pressure on raising revenues as a way to deal with the deficit rather than dealing with the issue largely through spending cuts. And there very well could be pressure for other kinds of taxes, besides carried interest reform, that would affect commercial real estate firms and individual investors.
Ultimately, there are now a great many questions stemming from the political climate that promise to affect the commercial real estate industry. And, unfortunately, there is no sign that any of this is going to become any clearer in the near future.
Most real estate experts are hoping the 2012 election cycle proves to be the watershed event that begins to clarify these questions. Let’s hope they are right.
Contact Editorial Director David Bodamer at [email protected]