An Election, a Fiscal Cliff, and the Cost of Borrowing

 With the election less than two weeks away, the question of which candidate will better serve the interests of the commercial real estate industry is foremost on people’s minds. If elected officials’ choices while in office were consonant with their positions and proposals on the campaign trail, the question might have an easy answer. In practice, presidents revert to the mean. The general fragmentation of authority in Washington means that the most extreme proposals – for better or worse – are more easily propounded than passed into law.

Congress’ failure to address the imminent fiscal cliff until the lame duck session speaks to the basic disconnect between American business and Capitol Hill.  For many industries, a wait-and-see approach to investment and hiring is the order of the day.  The costs of waiting until after the election and a decision on taxes can seem small as compared to the potential cost of making the wrong bet today.

An agreement on personal income tax rates does not necessarily go hand-in-hand with an agreement on other taxes. For investors seeking to cash out before a threatened rise in the capital gains rate, time is running short. One thing working to their advantage, the availability of financing has been improving across a larger number of markets. Our team’s tracking of both acquisition and refinance loans shows an uptick in the first weeks of the fourth quarter. Volume is up; borrowing costs are down.

Apart from real estate drivers, declining borrowing costs simply reflect historically low Treasury rates, which continue to plumb new depths. 5- and 10-year TIPS offer negative yields and yet they remain enticing, underscoring that things are not right in the world. Last week’s auction of 30-year TIPS commanded yields of just 0.48 percent, the lowest cost ever registered. One interpretation is that investors are growing concerned about an uncontrolled rise in long-term inflation, even if it is not a near-term issue.

For the time being, there is little upward pressure on nominal benchmark rates, either from observable inflation, momentum in economic activity, or normalization of conditions in Europe. Here’s the catch: if you believe your candidate for president can set the world right and do it in short order, you should also expect he will bring higher borrowing costs in tow.