How Would Another Biden Administration Affect Commercial Real Estate?

In this article, you'll learn:

• The impact of rising interest rates and hybrid work trends on commercial real estate, particularly in central business districts.
• How Biden's policies could influence commercial real estate, especially through initiatives to convert offices to housing.
• Challenges in merging commercial real estate recovery with sustainable development.
• The effects of the CHIPS Act on industrial real estate and domestic production incentives.

As we get closer to the 2024 presidential election, the country seems to be slipping into more chaos and indecision.

When it comes to real estate, a whopping total of 11 interest rate hikes since March of 2022 are hard to ignore. And despite a glimmer of hope surrounding potential cuts, the inflamed rates have the sector in a chokehold. Major developments have largely stalled pending lower rates, throwing fire on the vacancy crisis in the office market.

The complications surrounding the office market remain one of the most staggering challenges entering the next four years. So, what could solutions look like under the Biden Administration? Let’s discuss how the precedents set for the first term will play out if they’re elected for another four. Everything, from interest rates to foreign policy, comes into play.

And whenever it comes to politics, know that we are looking at the unbiased facts that will affect the commercial real estate sector. That being said, let’s dive in.

Most of the environment below is symptomatic of an all-out Office Apocalypse. Corporate tenants who want to take action can skip the drama and download their free survival guide today. 

Office Market is a Big Question Mark

If we are looking at the biggest forces in commercial real estate for the next four years, the office market is quite the place to start.

Rapidly dropping property values, coupled with low demand, have caused uncertainty in the sector to skyrocket. Negative ripples from drop in office use have, in turn, decreased foot traffic, caused property values to dip, and started a cycle in many cities known as the Urban Dystopian Spiral. Of course, this carries severe implications, from a drop in city revenue to a rise in crime and mass closing of retail stores. This environment in turn keeps pushing property values down.

And dropping property values is a significant issue that will have to be dealt with in the coming years,

According to Green Street’s Commercial Property Price Index (CPPI), commercial property prices have experienced a substantial decline, falling by 7% over the past year and by 21% since their peak in March 2022.

This downturn is particularly severe in the office sector, which faces an average nationwide record-breaking vacancy rate of around 21%, compared to the industrial sector’s much lower vacancy rate of approximately 5%.

The devaluation of office properties is widespread, evidenced by several fire sales of major office towers and the prolonging of sales through "extend and pretend" strategies.

This situation poses a significant challenge for the incoming administration because they’ll inherit a complex and precarious landscape.

With a potential $1 trillion crisis on the horizon by the end of 2024, there is a looming threat of a bank bailout if landlords are unable to meet their financial obligations.

Small and regional banks are particularly vulnerable, holding more than $2.7 trillion in commercial real estate debt, according to Columbia Business School.

The office market's struggles represent a critical issue that the next president, whether Biden, Trump, or another candidate, will need to address to stabilize the commercial real estate sector and prevent a broader financial crisis.

So, with the gravity of this crisis in mind, what would potential solutions look like in the Biden-Harris administration.

Suggested Solutions From Biden Administration

The Democratic administration has been attempting to push a solution that seeks to kill two birds with one stone. They want to convert the burden of old, empty offices into affordable housing that quells the severity of the housing crisis.

Part of this involves simplifying the process and cost of conversions.

The Biden-Harris Administration is introducing new measures to facilitate the conversion of high-vacancy commercial buildings into residential spaces, which include new financing options, technical assistance, and the sale of federal properties. A statement from the White House explained, 

The solution, if you could call it that, is far too limited in opportunities to become widespread. Not to mention, it is extremely expensive. For context, The Wall Street Journal estimates that it would cost $300-$500 per square foot for eco-friendly conversions. Read more about the Costly Complexities of Conversions.

And it relies on pushing a pipeline of reinvented green properties through heavy environmental regulations and grants.

Eco-Friendly Properties

On top of the push for conversions, the democratic administration has been rallying behind the Green New Deal and other similar eco-friendly initiatives. If we are under another Biden presidency for the next four, we can expect this to continue.

The conversation about conversions is inextricably connected with the future of eco-friendly real estate. Many of the grants come with the condition that carbon-neutral technology, and sustainable building practices be used. 

In November 2021, President Biden signed into law the bipartisan Infrastructure Investment and Jobs Act, a $1 trillion spending package devoted largely to national transportation, clean water, and electrical grid projects—areas of significant interest to commercial real estate professionals.

Additionally, under Biden's leadership, the Department of Housing and Urban Development is appropriating $85 million through a competitive grant process to develop adaptive reuse strategies aimed at converting obsolete commercial real estate into affordable housing.

However, the question remains: is $85 million enough? This is really a drop in the bucket, because while it looks good for optics, it barely covers the cost of converting a few buildings. Again, the cost per square foot for such a renovation is estimated to begin at $300–$500. Of course in an urban area like New York City, expect these prices to be multiples of this. 

Such government mandates are coming at a time when landlords are giving the keys back to their buildings. Many, if not most, office buildings in urban areas are no longer financially viable. Nor did they look like they're going to be in the coming years.

The scale of the challenge is immense, and while these funds are a step in the right direction, the commercial real estate sector requires more substantial investment to address the widespread issues of property devaluation, vacancy, and the need for sustainable development.

Balancing economic viability with eco-friendly goals will be a critical task for the Biden administration as it seeks to navigate these complex challenges in the years to come.

Because the problem is not going to go away easily. Office landlords are saddled with debt and with new carbon neutral regulations for building operations, they’ll just be tasked with more costs. In an environment where landlords are dropping like flies on their non-recourse loans, this could spell more trouble. 

Industrial

On the other end of the spectrum, the Biden Administration passed the CHIPS and Science Act last year. This has had major implications on the country’s industrial real estate and tech leasing.

The White House promised to devote $52 billion into the expansion of the US’ science and technology center. There's a federal initiative to reduce dependence on foreign countries for supply chains and manufacturing. Simultaneously, the goal is to boost the global prowess of the United States’ competitive tech status.

And this has two major effects: Sharing the wealth of big tech among smaller cities in the country and the rise of onshoring of industrial facilities and sharing.

So, part of the initiative behind the CHIPS Act involves decentralizing the country’s existing tech-strongholds in hopes of making the entire nation a powerhouse.

Geopolitics and other shifting economic conditions have triggered new opportunities concentrated in the south. Read about the business-friendly sun belt.

This shift also aims to loosen ties with countries such as China in favor of domestic or nearby production.

And now, the initial expansion in the South is now rippling through neighboring states along the Gulf of Mexico, showcasing a strategic move towards boosting national prowess in technology production.

The CHIPS Act also boosts onshoring by encouraging domestic production of semiconductors and other high-tech components, reducing reliance on foreign supply chains. And the establishment of new manufacturing facilities will drive demand for industrial spaces, including factories, warehouses, and research and development centers. This surge in demand will lead to increased property values and rental rates in regions hosting these new facilities.

Takeaways for Tenants

The incoming administration, whether Biden-Harris or another, will inherit a complex landscape. Stabilizing the commercial real estate sector and preventing a potential financial crisis will require balancing economic viability with sustainable development. The next four years will be pivotal in addressing these challenges, shaping the future of real estate and the broader economy.

Navigating the complexities of the commercial real estate sector over the next four years will require tenants to stay informed and adaptable because they're more minefields than ever to avoid. So cut through the noise and get facts straight from the experts. 

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