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Election Disruption

Will the Republican sweep help or hinder the nascent real estate recovery?

U.S. real estate showed tangible signs of improvement in 2024 as prices stabilized and fundamentals strengthened.^[1] Yet as the real estate recovery took shape, the November 2024 elections cast uncertainty over the outlook. Treasury yields reversed course in mid-September, moving above 4% in October on rising expectations (we believe) of a Trump victory^[2] This begs the question: Will the Republican sweep help or hinder the nascent real estate recovery?

From our perspective, conventional wisdom appears to hold that a program of deregulation, tariffs, tax cuts, and curbs on immigration will fuel modestly higher economic growth, inflation, and interest rates. Yet conventional wisdom could be wrong. True, deficit-financed tax cuts could stimulate the economy and put upward pressure on interest rates (due to more restrictive Federal Reserve (Fed) policy and a higher term premium on longer-dated debt) — unless offset with tariff revenue and spending cuts. Reduced immigration could slow the economy (with fewer workers and consumers) but its impact on inflation is ambiguous (it would weaken both aggregate supply and demand). Tariffs could hurt growth and lift prices, but deregulation and tax cuts (by supporting productivity) could do the opposite.

“Bring me a one-armed economist,” President Harry Truman is reputed to have thundered, “so that he can’t say ‘on one hand’ and then ‘on the other.’"^[3] With apologies to President Truman, we believe that the net effects of these countervailing forces are hard to predict. Nevertheless, assuming that conventional wisdom is broadly correct, the consequences for real estate will be benign, in our view.

Start with interest rates. While Treasury yields have risen, credit spreads have also tightened as risk appetite has grown — long-term corporate BAA yields (to which cap rates are closely correlated) ended November only slightly above their September lows.^[4] Policy changes may arrest their decline, yet further rate cuts from the Fed — consistent with its forward guidance — will in our view keep long-term rates anchored near current levels. This interest rate scenario is consistent, we believe, with cap-rate stability that would neither buoy nor penalize valuations, while preserving a healthy income return — the highest in a decade — for investors.^[5]

Moving to fundamentals, we would first note that prospects have brightened irrespective of political considerations. Demand has generally emerged from a post-COVID lull, while the supply pipeline has evaporated, with construction starts (on a sector-weighted basis) sinking 70% from their mid-2022 peak. Policy could add further support: To the extent that it promotes faster growth (once again, a debatable assertion), we would expect to see stronger real estate demand. Meanwhile, a combination of higher tariffs (particularly on politically salient items like steel) and tighter immigration (foreigners are disproportionately represented in construction trades) could extend the development hiatus. Tight market conditions will, we believe, drive accelerating rent growth, which will in turn propel capital appreciation even without the support of falling cap rates.

Elections have added a layer of uncertainty to the outlook. Ultimately, whether policy helps or hinders the real estate market will depend on the scope and timing of any changes. Under a baseline scenario, however, where growth and interest rates receive a minor lift, we believe that the impact will be modest overall — forestalling cap-rate-compression but reinforcing income returns and rent growth. In short, we believe that the real estate recovery that began in 2024 will remain intact.

Additional Resources

Real Estate Debt Opportunity

We believe attractive yields and spreads, reduced cyclical risks, and an expanding opportunity set may be reasons to consider real estate debt from a tactical perspective.

The Strike is Over but the Drama at the Ports may Continue….

East and Gulf Coast Port Labor Dispute and its Implications

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Though mortgage rates have fallen in anticipation of the Fed’s rate-cutting cycle, low housing affordability persists lifting renter demand and investment performance.

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Election Disruption

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