Post-election Investment Strategies: Navigating the Unknown
No larger and ongoing impact on the commercial real estate industry exists than the state of the economy. Availability of capital, inflation-driven costs and interest rates are parameters that direct what is possible and ultimately how much return an investment can garner.
Now that the election is over and more economic news has come out, markets are showing concern that inflation—and, therefore, interest rates—might be on a longer-term rise. All this has implications for how real estate investors should plan.
Before the election, economists marveled at how the country seemed on the glide path for a so-called soft landing—falling inflation, GDP growth and a solid labor market. September brought a 50-basis-point cut in the federal funds rate by the Federal Reserve. The next time the Federal Open Market Committee met was in November, bringing another 25-basis-point cut.
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The two rate cuts should fuel the economy and lower the cost of money, creating additional liquidity in the market. Between those two rate cuts came the election, bringing incoming administration plans for the country and the economy. New directions could include tariffs that cover many product types and range in size, depending on the exporting country. Such fees, paid by U.S. importers, could increase prices to companies and consumers, possibly reducing domestic spending and slowing GDP growth.
The administration’s tax plans are another strategy that could have mixed influences. They would return money to taxpayers, adding significant liquidity to markets. However, that could potentially increase inflation, adding new costs to properties available for acquisition and investment. It’s too early to tell either way for certain, especially as details would be determined in Congress.
Should you take the plunge?
Additionally, there are market indications beyond the control of any president that should be at least cautionary for responsible risk management. Jobs plummeted from an expected 110,000 to 12,000, though much of that may have been due to the significant lack of early reporting from surveyed companies because of Hurricanes Helene and Milton. It won’t be until November numbers are available in December to see whether something should cause concern.
The October Consumer Price Index numbers show year-over-year inflation is up to 2.6 percent. The regular Dow Jones poll of economists expected the increase. Because it took place last month, it wasn’t a direct effect of the election, which, if inflation continues to rise, will be cold comfort.
Finally, yields on the 10-year Treasury have largely been on the rise since mid-September. In mid-November, they were in the 4.4 percent range. Investors and traders seem to think interest rates are trending up for the long run. Look at the projections by firms like Chatham Financial and you will see that current values are nearing those that mathematical projects of bonds would suggest for mid-2028.
The only predictable thing at this point is uncertainty, a problem for investors and developers. Do you take a plunge now, so long as deals pencil with adequate profit, or wait and hope the future changes?
Instead, do both. Finance today as though rates will go higher to lock in favorable terms. If rates do drop, you can always refinance in the future. Action today becomes its own hedge that is less expensive than buying an interest rate cap.
Jonathan Hipp is principal, Capital Markets, & head of the U.S. Net Lease Group for Avison Young.
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