Midterm Elections Will Impact Real Estate

WASHINGTON, DC-Republicans are going to take over the House of
 Representatives, pick up a number of governorships--which is
 especially significant in a re-districting year--but will not likely get
 the Senate. So said Larry Sabato, University of Virginia Center for
 Politics director, one of the keynote speakers at the Urban Land 
Institute’s annual conference, which is winding down today.

Sabato’s track record is exceedingly good, so for all intents we 
can skip the debate about last-minute surges and erroneous poll 
numbers and get to the question GlobeSt.com readers most want to know:
 what will a Republican surge mean for commercial real estate?
 Normally this is a subject of greatest concern in a presidential 
election year but the economy is still fraught with uncertainty and
 partisan passions are running higher than ever. In short, even a 
mid-cycle election will have implications for the industry.

The most obvious change will be legislative gridlock, Sabato said.
 Many of the winning Republican seats will be held by so-called Tea Party candidates, who are in no mood to compromise. There is zero chance 
of Congress passing ambitious legislation in the next two years,
 Sabato said. “In fact, I doubt we could even see this next Congress 
agree on language for a Mother’s Day resolution.” Controversial 
legislation the industry had been dreading, such as carried interest,
 is all but certain to be relegated to the backburner until after the
 presidential election.

Industry executives who favor a Republican-led Congress also have the 
long-term to look forward to: Republicans are poised to take many--but not all--state governor seats this year, Sabato said. Because of 
the Census, that will put them in charge of redistricting, the impact of which will be felt for the next 10 years.

A Republican victory for the House will also be felt in more subtle
 ways, said Joe Brennan, senior vice president at Jones Lang LaSalle, a 
panelist on one of the ULI sessions.
 For instance, he pointed to the discussions Reps. Eleanor 
Holmes Norton and Jim Moran have been having about the 
Department of Defense and its space requirements. “Norton and Moran
 say some of the functions of the DoD, with a lot of civilian
 employees, don’t have to have all of the security criteria for
buildings, such as the setbacks,” said Brennan. “There are others who argue that, yes, 
the DoD does need that for all of its functions. If the House goes
 Republican there is the potential for a shift in those talks.”

One factor that won’t change--even if there is a wholesale shift in 
Congress’ makeup--are the demands for space by the federal government 
for the next 12 to 24 months, Brennan said. Even the swing space that
 federal agencies are occupying temporarily as their buildings undergo 
renovation and green rehabs is likely to morph into permanent space.
“Swing space almost always transforms into permanent space and my
sense is that is what is going to happen again,” he noted.

After that 12- to 24-month period, Brennan said, the pace of growth will 
definitely slow. By then, though, the impact on rents will be making 
itself felt, at least for the Washington, DC area as well as other 
markets where the federal government is leasing up space. He 
predicts a rise in rental rates due to the aggressive federal space
 procurement.