Change in leadership of the U.S. executive branch is generally followed by changes in policy. When the change in leadership is also a shift of political parties, then policy changes can be significant.
Investors always have to reconsider their commercial real estate portfolios and strategies. Here are some key questions that should be considered going into 2025: (1) What is likely to change in policy? (2) What policies could potentially remain unchanged? (3) What policies could be revived from prior terms? (4) What macroeconomic and geopolitical forces might also have an impact?
Opportunity Zones
An extension of the tax code changes from the Tax Cut and Jobs Act of 2017 is a high priority of the administration and the GOP-led Congress. This could have a major impact on commercial real estate because it would include an extension of Opportunity Zones, possibly restarting with the full tax benefits for investment in certified economically distressed communities rather than the originally scheduled reductions.
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Corporate tax rates
Corporate tax rates might remain at 21 percent and bonus depreciation for personal property is also likely on the agenda.
Interest rates
There are also challenges. One is the slowdown in expected interest rate cuts. The Federal Reserve kept the baseline federal funds rate at the existing range in its Jan. 29, 2025, meeting and signaled at the end of the December meeting that it might slow the pace of cuts.
Some Wall Street participants speculate that there is a possibility of increased rates sometime in 2025. For example, Thanos Papasavvas, founder & chief investment officer at ABP Invest, wrote in a Financial Times op-ed that “we expect the resilient U.S. economy and Trump’s polices to push inflationary expectations higher and force Fed chair Jay Powell to increase rates from September onwards.” That was based on the strength of the economy, the new administration’s policies which ABP thinks could lead to higher rates and the Fed’s need to keep credibility by increasing interest rates if inflation begins to rise.
Tariffs
The administration’s strong stance on 25 percent tariffs on the country’s largest two trading partners, Mexico and Canada, and an additional 10 percent tariff on goods from China could negatively affect the economy. Whether an extensive public negotiation tactic or an actual policy shift, this creates uncertainty.
Bond market
On the macroeconomic front is the bond market. Traders are concerned about inflation and also the federal budget and deficit spending. The more the U.S. government has to borrow money, the greater the amount of government spending needs to be allocated to make the payments on the debt, a cycle which, in the absence of ending deficit spending, will continue to spiral.
Strategy
In the face of uncertainty, investors have two strategy options. One is to do what everyone has been doing for the last 18 to 24 months, which is to wait and see. There is a non-zero cost to doing nothing though. Investors expect returns, and funds, developers and others who have raised money will need to deploy capital at some point.
The other choice is to harvest some of the currently available opportunities. If the administration fails to deliver its tax promises, investors can profit. If conditions do improve in the future, the investor can take advantage of better conditions by moving to a more satisfying opportunity or refinancing at a lower rate. Better the bird in the hand today with the second option.
