Cross-party disputes are set to shield commercial real estate markets from knee-jerk policy changes following the US election, according to the executive managing director Cushman & Wakefield New Jersey, Gil Medina.
Both President Obama and challenger Mitt Romney promised to pursue aggressive yet contrasting models for the restructuring of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation – known colloquially as Fannie Mae and Freddie Mac respectively – whilst campaigning for Tuesday’s election.
Both Fannie Mae and Freddie Mac, who are privately owned but sponsored by the federal government, have backed over 90% of residential and commercial mortgage applications in the US since the 1990s. However, investments in sub-prime mortgages led to an eventual $360bn bail out and takeover by the US Treasury Department.
President Obama promised to consider replacing the two government bodies with a new system to give insurance responsibilities to private companies and limit government involvement should the markets experience the same disruption in future.
Gil Medina predicts: “A more limited role by the federal government in the secondary mortgage market, as proposed by the President, may lead to shorter-term mortgages, (e.g., the elimination of 25- and 30-year mortgages) higher interest rates and possibly higher down-payment requirements.
“With Congress enjoying a Republican majority and the Senate a Democratic majority, President Obama will contend with divided government for at least two more years. This may be a good thing for the nation’s corporate real estate industry because policies that could have a dramatic impact on it will need to survive the scrutiny of two parties.”
President Obama has also spoken of his support for the ‘Buffett rule’, which would raise capital gains tax to 30% for individuals making more than $1m per annum, whereas Romney would have maintained the tax at 15% and abolished it for those with earnings of less than $200,000.
Both challengers disagreed on the Dodd-Frank act which was a key aspect of Obama’s first term, with Romney considering it an undue burden to the economy. Residential property loans are usually 20-30 years, whereas commercial loans are generally underwritten for 7-10 years.
Commercial loans could be amortized as if they were longer term, with substantial ‘balloon’ payments towards the end of the agreed loan period. Borrowers, who have generally refinanced their debt at this stage, may be forced to default under the act, which would have drastic effects of the $300bn refinancing of commercial real estate loans throughout 2012, projected to rise to $2.4tn by 2018.
The Building Owners and Managers Association estimates the contribution of the office building industry to the US economy at more than $200bn per year, with the nation’s real estate sector worth an estimated $2.9tn. Since 2000, Direct Weighted Average Gross Asking Rental Rates for office space have stayed between $21 and $31 per sq ft.