Whether you call it a log jam or gridlock, several advisers and trade media are heralding a split U.S. Congress as good news for corporate America.
That sentiment was indicated in a recent Financial Times article that proclaimed, “an old piece of conventional wisdom resurfaced in U.S. corporate circles as the divided government is good” because a lack of total control “prevents either party from doing anything too extreme.”
In a more industry-specific opinion, real estate and mortgage brokerage research and advisory firm Marcus & Millichap Inc. MMI claims that based on history, a split Congress will also be good for commercial real estate (CRE) investors.
“If the past is an indicator, barring any future crisis like the pandemic, a divided Congress suggests there will be gridlock,” said John Chang, senior vice president for research services with Marcus & Millichap. “Basically, very little gets done. No big fiscal policy changes, no stimulus, no infrastructure investment, no healthcare changes, no major tax law changes. Whenever tax law changes have been on the table, it has been an incredible distraction.”
In a video press release from Marcus & Millichap this week, Chang looked at past investment performance during years when Congress was divided and summarized, “I suggest that this stability or taking a breather favors commercial real estate.”
Chang also said that having at least two years of gridlock sets government rules in place for two years. Based on past statistical models related to years of a split government, he believes that history will repeat itself with performance metrics including:
- 2017 changes to 1031 tax-deferred exchanges occurred when retaining earnings and capital gains were on the table. The divided Congress in 2017 stalled any decision-making.
- Using the National Council of Real Estate Investment Fiduciaries' total return index as a measuring stick, the average return in years when Congress was controlled by one party was 8.3%. When the houses were divided, the average CRE return was 10.8%.
- The trends are apparent if you look back at the cycle since 1980. Congress was split from 1981 to 1986 and saw average CRE returns of 12.7%.
Chang summarized that regardless of whether new laws benefit CRE investors, potential changes are still a distraction and a variable that stalls investors. He believes commercial real estate investors can lock in their playbook “with the advantage of having a much clearer view as you keep your eyes on the horizon.”
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