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November 9, 2018

The Democrats’ newly-won control of the U.S. House of Representatives could breathe new life into President Donald Trump’s infrastructure investment plan, lending a boost to commercial real estate and the overall economy.

U.S. voters handed control of the House to the Democrats in the U.S. midterm elections on Tuesday. Republicans maintained hold of the Senate.

If the two houses of Congress can work together – a big “if” – it could open the door for Trump’s proposed US$200 billion in federal incentives and financing for infrastructure, with the aim of spurring US$1.5 trillion of additional investment from states, cities and the private sector. The President had put the plan on hold until after the midterm elections.

“Spending on infrastructure remains a possibility given the Democrats’ enthusiasm for it,” says Ryan Severino, Chief Economist at JLL. “But some Republicans could push back, citing its cost at a time when both deficits and debts are rising.”

Trump, in a press conference Wednesday, said he and the Democrats “have a lot of things in common on infrastructure.”

Smart investments to improve the nation’s roads, ports, utilities and other vital infrastructure could unlock tremendous value for the overall economy and commercial real estate, Severino says.

To be sure, the results of the election are unlikely to directly impact commercial real estate (CRE) in the short term, Severino says.

“We expect little, if any, direct impact,” he says. “We generally expect what we already anticipated — a continuation of gradually rising vacancy rates across property types coupled with slowing rent growth as the economy slows.”

That being said, there are some areas, in addition to infrastructure, that real estate investors are eyeing more closely now that the balance of power has shifted.

Trade policy

The Trump Administration’s tariffs – import taxes on goods from China – are an “added expense that drives down demand for goods, which in turn drives down the demand for warehouse space to store those goods,” Severino says, predicting that the trade tensions will cause a drag of up to 20 basis points on the growth of industrial asking rent in the next year.

Despite Democrats seizing the House, the President “still has a wide berth on trade policy, because the administration will still largely control trade relations with China,” Severino says.

Democrats will likely pass the U.S.-Mexico-Canada trade agreement, so there is unlikely to be much of an impact there either.

Other trade actions that require Congressional approval, however, could become more challenging for Trump to move on, Severino says.

The economy

The economy was set to slow down regardless of the midterm outcomes, Severino says, predicting economic growth of roughly 3 percent this year followed by growth of roughly 2.5 percent next year and further slowing in 2020.

“The outlook stems from fading fiscal stimulus, labor scarcity, quicker wage growth, stronger inflation, higher interest rates, a stronger dollar, and restrictive trade policy,” he says.

However, if an infrastructure plan was passed, that could provide a slight boost to GDP growth by way of government spending in the short run and productivity growth in the medium to long run, depending upon which projects are undertaken.

Post-election relief

The removal of the uncertainty surrounding the election will take some tension of the air. That’s a positive for both publicly-traded markets and the economy, Severino says.

“Markets also tend to respond favorably to a split Congress because of the need for compromise,” he says.

Click to read about what CRE investors can learn from Hurricane Michael.

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Ryan Severino

Chief Economist, JLL

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