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Forecast: Slow economy and a Democratic White House

How’s this for a bold prediction? Not only should investors brace for a sluggish economy next year, but 2009 will see a Democrat president into office, economists predict.

The financial outlook for 2008 dimmed two days before Thanksgiving when the Federal Reserve projected GDP growth of 1.8% to 2.5% for next year, down from the previous forecast of 2.5% to 2.75%. For commercial real estate investors, that expected decline from the third quarter’s 3.9% GDP growth foretells that many companies will grow reluctant to sign long-term leases in 2008. These firms could also gain the upper hand in negotiating rent, limiting the potential to grow property incomes.

Longer term, the slowing economy suggests investors should prepare to do business under a Democrat-controlled presidency, some economists predict. In election years when businesses are flourishing, the nation tends to elect Republican presidents. But when the economy is suffering, the trend is to elect a Democrat, explains Dr. James Smith, chief economist at Parsec Financial in Asheville, N.C.

Smith, by the way, expects the economy to rally early next year and post 4.1% GDP growth in 2008. Other economists interviewed by National Real Estate Investor project GDP growth between 1.5% and 2.4% for next year, in line with the Fed’s forecast.

“If the consensus is close to correct, then the next president will be from the Democrat party,” Smith says. “If mine turns out to be close to the actual, then we’ll have another Republican in the White House.”

Do presidential politics affect commercial real estate decisions? Absolutely, contends investor Warren Diamond, CEO of American Real Estate Management LLC.

“The philosophy of the Democrats could have an impact on national spending, which in my opinion will just bring about higher taxes, especially for higher tax rungs,” Diamond says. Tinton Falls, N.J.-based American Real Estate Management owns 4 million sq. ft. of self-storage and mixed-use projects in the Northeast and California.

Republican administrations tend to be tough on inflation and emphasize controlled spending, while Democrats are more likely to boost government spending and ease inflation-fighting measures, according to John Burford, senior vice president and investment portfolio manager at the International Bank of Miami. The economy and stock market generally fair better under Democratic leadership because government spending, and particularly deficit spending, is a powerful boost for economic growth.

Conventional wisdom also holds that Republicans work to suppress tax burdens, while Democrats focus on beefing up government programs, which requires increased revenue and can spur higher taxes. In light of the slowing economy, investor Diamond believes Democrats will have an advantage on major policy issues next year and are likely to carry the presidential election. That is a signal for investors planning to sell a property to act before the new administration takes office, he says.

“If Democrats raise the capital gains tax, say 10%, that makes the difference in the decision of whether to sell a property,” he says. “Any savvy real estate developer will certainly protect his positions. If you don’t, you might end up paying an additional 5% or 10% in taxes.”

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