Next Election Cycle Threatens Net Lease Boom

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Toby Scrivner

What a surprising end to 2018! Record-setting sales volume sent annual gains in the net lease sector soaring past the previous year’s total to reach $65.3 billion. While this falls just short of surpassing the all-time record of $65.8 billion set in 2015, revisions and additions to last quarter’s transaction list are expected to push 2018 annual totals past the record high, into the $66.5 to $67.0 billion range.

Will this tremendous level of sales activity be hard to beat in the future? Absolutely!  But the same was true when the market posted never-before-seen levels of activity in 2013, 2014 and again in 2015. A drop-off occurred in 2016 leading up to the last presidential election―always a time of uncertainty for investors―but the market has since regained strength and momentum, posting increasing levels of sales activity in the last two years. Today’s strong economic climate has allowed investors to buy with confidence, but as we find ourselves entering the next presidential campaign cycle, it begs questioning what sort of influence this process may have on the net lease markets between now and the end of 2020.

The Dangers of Overthinking

Political uncertainty can have a crippling effect on net lease investors, especially when there is a possibility of a change in administration or party affiliation. If the in-control party changes, how will that influence tax laws? Will the next administration be business-friendly? Should I buy or sell now, or is it better to wait? These questions and more often lead to investors suffering from “paralysis by analysis.” In an attempt to time the market just right, investors risk over-thinking a situation that, in fact, might not have much, if any, impact on the real estate market at all.

When studying recent trends, there is no evidence that suggests a direct correlation between the party affiliation of the current administration and its impact on the commercial real estate market. Instead, changes in the health of the market, as measured by total sales volume, seem to be less influenced directly by party affiliation and more so by overall economic influencers. As an example, during the Obama administration, despite the Democratic party’s reputation of being less business-friendly than the Republican party, the market reported nearly $375 billion in sales volume during the eight-year term. This was an unprecedented amount of sales gains for any president or administration in history. But it wasn’t the political party itself driving those sales numbers―it was the strengthening of the overall economy as the U.S. market recovered from the Great Recession.

Now, after posting a record quarter, and, likely a record year, of investment sales, the market could ride that momentum into 2019 and post consecutive record-breaking quarters of sales activity. But timing is against us. Not only is the next economic downturn a possibility for the near future, but we find ourselves approaching the end of President Trump’s first term in office. Opposing candidates are beginning to announce campaign plans, and despite no direct correlation to the actual health of the market, investors may be tempted to pump the breaks and adopt a “wait-and-see” attitude. The better strategy, however, is to relish in today’s economic stability and maintain a positive mindset―not only is it better for your personal well-being, but it’s also good for the net lease real estate market.

 

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