the words presidential election loom in sky to convey election year influence on commercial construction

Election year influence on commercial construction

Here’s what business owners and developers can expect

Commercial real estate developers, as well as business leaders, are no doubt anticipating the upcoming election year with mixed feelings. As U.S. history continues a periodically volatile trend, it stands to reason that those on the front lines of business and industry are watching for indicators of what might be ahead for the economy, including the commercial real estate markets. The assumption is that elections can fundamentally impact investment returns on commercial real estate and the multifamily housing market. But is that true?

How election years influence commercial construction

Presidential election years tend to introduce a certain degree of uncertainty in various economic sectors, including commercial construction. Historically, these years often see businesses and investors adopting a more cautious stance, potentially leading to a temporary slowdown in investment decisions. This cautious approach stems from the uncertainty about a new administration’s potential policy changes, particularly concerning taxation, regulatory environments, and infrastructure spending. These factors can cause fluctuations in market confidence and financial market volatility, which in turn impact the commercial construction sector.

For instance, developers may hesitate to initiate new construction projects in election years until the post-election policy directions become clear. This delay can be attributed to the potential risks associated with regulatory and fiscal policy changes. But it’s important to note that the real impact varies based on the specific context of each election, the prevailing economic conditions at the time, and the candidates’ policy stances.

Despite these uncertainties, the long-term nature of construction projects often means the sector’s momentum continues. While immediate response to election outcomes might reflect caution, the fundamental drivers of construction, such as demographic trends, urbanization, and technological advancements, continue to drive construction growth.

Election outcomes may have little influence

Additionally, research suggests election outcomes have little influence anyway, according to a study by commercial real estate advisory firm Newmark Knight Frank. The study looked at the performance of CRE under presidential administrations of the past four decades and found that the political party that controls Congress and the presidency may have a limited impact on the commercial real estate market, as that influence is shared with myriad factors, some of which wield greater pull.

One key finding is that there seems to be a correlation between a Republican-controlled Congress and increased office demand. However, researchers are careful to point out that correlation does not equal causation. Over the two decades before 2020, when Republicans controlled Congress, office absorption in America averaged 40.8 million square feet annually, while in times of a Democrat-controlled Congress, there was an annual negative office absorption trend of 6.3 million square feet.

The study also examined annualized total returns on commercial real estate over the previous 40 years and found that under Democratic presidents, returns averaged 9%, and under Republican presidents, they averaged 8.2%. In addition, the study points out that there is a lag effect from the time policies are passed to when their influence on the industry is seen, so while policy plays a part in market conditions, there is historically no clear indicator of which party benefits commercial real estate and multifamily housing markets the most.

The bottom line on elections and CRE

With the possibility of facing major party candidates similar to those in 2020, the upcoming election may bring similar levels of uncertainty. However, research suggests only a minor increase in job growth trends in election years compared to non-election years. This data provides grounds for developers to continue their growth plans in 2024 and beyond with confidence.

Partnering with a reliable design and build team can be crucial in this phase, helping developers capitalize on opportunities while managing costs and minimizing changes. Contact us for more insights on how a design and build approach can benefit your commercial real estate or multifamily housing projects.