What President Obama’s re-election means for commercial real estate
Nov 21, 2012
Now that the election is a couple weeks behind us, talk has shifted from the re-election of President Obama to potential solutions for the impending fiscal cliff. If the president and Congress can’t compromise, the combination of spending cuts and tax increases enacted on Jan. 1 could drag the U.S. into another recession, according to the Congressional Budget Office.
While we expect to see a compromise to avoid the fiscal cliff, other areas of uncertainty remain, such as changes to tax policy and lingering unemployment. While much of the economic uncertainty seemed to hinge on the election, the only issue that the election resolved is who will be president for the next four years.
The fiscal cliff, tax changes, and the state of the economy remain essentially unchanged since this time two weeks ago. But some investors are taking matters into their own hands. Here are a couple recommendations for protecting your portfolio in this uncertain environment.
Many fear that changes to tax policy in 2013 could adversely affect investment activity. With fewer than 45 days left in the year, we’re seeing a lot of appraisal activity as investors seek to sell assets under the current capital gains tax rates. If you plan on selling an asset in the next six months, we’d recommend that you consider completing the deal before the end of the year to take advantage of the current rates, as many experts predict they will rise on Jan. 1.
Apart from taking advantage of current tax rates, the uncertainty surrounding the economy can be largely circumvented through commercial real estate. With interest rates near zero for the foreseeable future, real estate can be a desirable investment right now, especially for well-leased properties with a solid income stream.
A good quality property might not have the potential for the higher yields of the stock market, but it’s much more secure. Further, the downside for stocks is much greater. Volatility should be avoided at all costs. Institutional investors in particular are looking to commercial real estate for more consistent returns, and foreign investors continue to show interest in U.S. real estate for long-term investments. As a result, we’re seeing some cap rate compression and value increases due to the lack of alternative investments that can provide a solid return with limited risk.
So far we have only discussed quality real estate assets with strong leasing structures. This is where the commercial real estate markets separate. For higher risk properties, it’s a totally different story. Such properties are much more difficult to finance and the pool of potential investors is limited. As a result, investors are seeking and getting large premiums for taking on such risk. Properly identifying the risk profile in an asset is the difference between reaping impressive returns and failure.
So while we’ll have to wait and see what President Obama’s second term brings, it’s safe to say that right now commercial real estate should be on the radar of every investor. However, proper due diligence is paramount to success.