November Election: What Changes for Real Estate in A Policy U-Turn?NovemberElection:WhatChangesforRealEstateinAPolicyU-Turn?

NOVEMBER ELECTION: WHAT CHANGES FOR REAL ESTATE IN A POLICY U-TURN? 

With labor markets still tight, and after a wild three years whipsawing real estate values, policy changes might be the difference between a delayed real estate recovery and an accelerated one. 

PGIM Real Estate’s regional research teams modeled two potential outcomes: status quo, defined as a Democratic president and a closely divided Congress; and a Republican sweep in which both the executive and legislative branches are fully controlled by a new nominee. They focused on three policy areas where there are likely to be substantial differences in the latter scenario: 

• Less migration, with reduced legal immigration and less unauthorized immigration. 
• More restrictive trade policies, which would be more restrictive in a Republican sweep due to new high tariffs. 
• Lower personal and corporate taxes, which would stimulate higher nominal economic growth but also higher Treasury rates. 

 

Less migration would pressure labor costs up, given today’s tight labor markets. This would be felt unevenly across the U.S., with metros on the right particularly exposed to wage cost pressures. Higher labor costs would also disproportionately hit sectors with high operating expenses. Retail, storage and industrial are best positioned to weather another round of wage increases. 

More restrictive trade policies would also have geographically disparate impacts. An increase in tariffs would weigh most on trade-dependent economies. The outlook is particularly uncertain for smaller East Coast ports like Savannah, Charleston, and Norfolk, which are major gateways for autos and other goods manufactured in Europe. By contrast, markets such as Laredo, El Paso and Detroit on the Mexico and Canada borders would be insulated from tariffs if those countries continue to be exempt due to the free trade agreement in place at least through 2026. 

Finally, lower taxes would be a boost to economic growth, but unless offset by deep spending cuts (not proposed by either party as part of their 2024 platform) would cause the fiscal outlook to deteriorate and long-term bond yields to stay high for longer. 

DOES RETAIL STILL OFFER VALUE IF CONSUMERS PULL BACK? 

Retail has endured six years of bankruptcies, a pandemic, and continued erosion of in-store sales from e-commerce. Nevertheless, retail returns were high than any other major sector over the past year. We think retail is well positioned to weather its next challenge: consumer fatigue. 

The topline in-store shopping data are sobering. On a nominal basis, retail sales are positive. However, factoring in inflation, annual retail sales are down by nearly as much as they were in 2020. After cleaning out the stores in 2022, it’s not surprising consumers are taking a breather. Retail sales are down because people aren’t buying many houses, leading to weakness in the home improvement and furniture categories. That will persist at least as long as mortgage rates remain high, and perhaps longer if economic growth slows. 

Credit cards and savings data also indicate that consumers are cutting back because they want to, not because they must. While nominal credit card debt is growing at its pre-COVID pace on a real (inflation-adjusted) basis, it has only recently surpassed its early-2020 peak. More recently, real credit card debt has leveled off, suggesting consumers are holding back. 

Households also have ample savings, after pocketing much of the stimulus payments in 2020 and 2021. Consumers have been spending down this excess savings since mid-2022. However, we estimate that consumers still have more than half of this savings available to them, ready for when they want to spend again. 

Finally, necessity retail property markets have not been in such good shape in decades. While malls and street retail remain weak, strip (neighborhood) center occupancies are now above 93%. Even within that segment there is a distinction. Centers without a grocer average 91% occupancy, and those with one are now 95% full. 

While the near-term outlook for consumption is less positive than it has been for the past few years, the retail sector enters this environment in a position of strength.