We recently caught up with Mike Comparato, managing director and Head of Real Estate at Benefit Street Partners, to discuss how potential outcomes of the US presidential and congressional races could have tax and economic consequences that affect commercial real estate. He also explains why he thinks multifamily housing is positioned for success after the election.
Q: How do you see the US election affecting the multifamily space?
A: Obviously, this depends on the outcome of the election. I think President Donald Trump’s re-election would probably leave things relatively status quo, and I would not expect any massive market movements in the short term.
I think the biggest risk to the overall real estate market, not just the multifamily market, would be a win by Democratic presidential nominee Joe Biden, coupled with the Democrats taking majority control of the Senate. In my view, that combination brings Biden’s proposed tax law changes front and center.
If he wins the presidential election, Biden has indicated in campaign proposals he will get rid of two of the mainstays of commercial real estate taxation: the 1031 exchange,1 as well as the stepped-up basis on the passing of an asset. I do not think this has any direct impact on the performance of multifamily assets. However, I do think it will have a meaningful impact on transactional volume as well as valuations.
Q: The valuation aspect certainly gets the attention of an investor in the multifamily space. Are there certain property types, regions or market types that would likely be more affected than others?
A: I do not think a tax change could incrementally hurt a specific geographic asset or asset class more than another. The pain should be felt relatively uniformly over geography as well as asset class. I would not expect one to materially outperform or underperform the other just as a result of election outcomes in the short term; how each president impacts the longer-term economy, however, will play a role.
Q: If we remain with a Republican Senate and president, what are some of the things that might be lurking in the policies that would have a positive or negative effect on the multifamily space?
A: I’m not aware of any meaningful policy changes. If we were to keep a Republican administration in the White House and a Republican-controlled Senate, I think they would mostly maintain the status quo. Hopefully, we would be getting to pre-COVID-19 status quo in a post-COVID-19 world, which I suspect means very low interest rates for a while, a strong economy that recovers and solid performance at multifamily assets across the country.
Q: If Biden wins the presidential election and the Democrats take control of the Senate, is it just multifamily that will feel some repercussions, or is it all commercial real estate?
A: I do not think there is a bifurcation between asset classes within commercial real estate as it relates to the presidential outcome. I believe Biden and the Democrats are potentially going to have meaningful tax law changes that directly impact commercial real estate across the board, whereas Republicans are not as likely to make changes.
There are really two parts to the question; what are the tax consequences, and what are the longer-term economic consequences? Commercial real estate is incredibly tethered to the overall economy. Whose path is the best for economic prosperity, Biden’s or Trump’s? I’m not going to give my opinion, but that’s really what it comes down to, which path would give us good gross domestic product growth and good employment numbers. I think Biden has made it clear that, if he is elected president, there would be a much higher tax bracket for high-income earners. So, what impact will that have on the overall economy? He’s going to provide tax breaks to the lower- and middle-income families across the country. Does that tax break result in multifamily becoming more affordable because homes have more disposable income? You just have to pick which side you believe would be the longer-term solution to those points.
Q: As a final question, because COVID-19 is front and center in the election, what effect do you think the pandemic has had on the attractiveness of investments into multifamily?
A: I think many investors consider multifamily to be the safest and most predictable asset class within the commercial real estate sector. I think COVID-19 has simply put a lot of exclamation points behind that statement.
If you look at the negative impact of the pandemic on hospitality, retail, office and multifamily, multifamily pales in comparison to what the other asset classes are suffering right now. What we have seen as a result of COVID-19 is a positioning of multifamily as a safe and predictable asset class—arguably the safest and most predictable—within the commercial real estate sector and as a result of that, we believe it’s going to attract more capital.
So, suppose capital sources have a certain allocation to overall commercial real estate. In that case, I think within that allocation over the course of the next few years, you’re going to see both institutional investors and private investors heavily skewed toward multifamily. I think the demand for multifamily is likely to go up and, as a result, I think capitalization (cap) rates—taking interest rates out of the equation—should go down.2
In my view, as long as interest rates stay where they are today, we’ll continue to see some sort of cap rate compression across the multifamily sector. Obviously, as you go down the quality curve in the multifamily sector, you’ll see cap rates increase. Still, overall, I believe multifamily cap rates should be declining in comparison to other commercial real estate assets, which are likely going the other way to mitigate uncertainty in those asset classes.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own investment professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
This information is intended for US residents only.
What Are the Risks?
All investments involve risks, including possible loss of principal. Investment in the commercial real estate sector, including in multifamily, involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation and risk tolerance.
Franklin Templeton (FT) does not provide legal or tax advice. Federal and state laws and regulations are complex and subject to change, which can materially impact results. FT cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
1. A 1031 exchange swaps one investment property for another and allows capital gains taxes to be deferred.
2. The capitalization (cap) rate is used as a measure to indicate the rate of return that is expected to be generated on a real estate investment property.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.