From a small northwestern observatory…

As of this writing (near the end of the business day on Monday) the Dow Jones Industrial Average is up 2.95% on the day, and has risen about 8.3% in the past 5 trading days. The broader S&P is up about 7.3%, and the NASDAQ is curiously down on the day but still up about 7% since last Monday. This morning, the bond market was up, consistent with expectations of lower interest rates. While real estate is only peripherally impacted by the securities markets, these liquid markets give some insight into investor sentiments in the wake of the election outcome.

As of today, it appears Joe Biden will be the 46th president, the Senate will still be in republican hands (although slightly less so) and the democrats will continue to control the house. This implies two very significant things for governance in the coming four years:

1. The Biden Administration will need to govern much closer to the center than if they had a democratic-controlled Senate; and
2. There will be considerably more stability in White House relations with capitol hill.

Clearly, the thousand pound gorilla is Covid, and any restoration of the economy to pre-pandemic state hinges on that. Wall Street is already discounting a small but very real stimulus package which should juice the GDP a bit — not as much as the first one, but something. What does all this imply for real estate?

Residential Investment

The homebuyer market and the rental investment market have done well this year despite the recession. Low interest rates have fed home buying, and the desire for social distancing has provided some marginal preference for single family rentals as opposed to apartments. Indeed, the apartment REITs are generally down on the year (there are exceptions) with particular problems in the student housing and eldercare sectors. However, built-to-rent REITs are doing fine.

The Biden administration is hoping to provide support for first time homebuyers (a group that the homebuilding community says is in short supply today) with a $15,000 tax credit. Biden would also propose some sort of tax credits for renters and increase Section 8 vouchers. We suspect this will be met with widespread support.

However, Biden has also proposed some sort of rent and mortgage forgiveness. This may have some struggles — in many cases, rental property is owned by small to medium sized investors, and the trickle-down impact on real estate service providers, who are already stretched thanks to foreclosure and eviction moratoriums, would be difficult. This would probably face head-winds on capitol hill.

Commercial Investment

The FTSI/NAREIT index of REITs was up 4.23% last week. Note that the index is down 15.61% for the year-to-date. Obviously, there are some gems in there — our ACCRE index was up about 2.4% last week but down about 2% on the year.

Every category of REIT showed positive movement last week with the exception of self-storage and regional malls. The big winners were residential, up 6.31% and industrial up 5.49%. Even lodging/hospitality, which has had an abysmal year, was up 2.97% on the week. Mortgage REITs, which have also had a terrible year, were also up marginally on the week.

This suggests broad optimism going into 2021, although it remains to be seen how all of this will play out. The best estimates we’ve seen thus far suggest three to four years for the worst-hit sectors to revive to pre-Covid levels after some sort of containment or vaccine is effective. That said, much of the worst is probably already captured in real estate prices, and absent some further or unexpected negative events, we may see some slow progress back to normalcy in the real estate markets.

As always, if you have any questions about this, please reach out! Best wishes, and stay safe!

John A. Kilpatrick, Ph.D. — john@greenfieldadvisors.com