A DEEP DIVE INTOTHE MIDTERM ELECTIONSIMPLICATIONS FOR THE

PROPERTY MARKETS

• The U.S. will hold elections for the entire House of Representatives and one-third of the

Senate on November 6, 2018.

• The outcome of the election will impact the political environment and possibly the policy

environment, but it is much less likely to significantly change the economic

environment or impact the performance of commercial real estate (CRE).

• The consensus is that growth in the U.S. economy is likely to remain healthy regardless

of the outcome of the election, particularly in the near term: 2018/2019. Given the

correlation, demand for CRE space should also remain healthy.

• The real estate policy environment is unlikely to change dramatically regardless of the

vote, but under certain scenarios, more of a gridlock situation could emerge. Historically,

congressional productivity has declined after the midterm elections.

• CRE values are more likely to be influenced by interest rates and the tremendous amount

of capital targeting North American assets. Closed-end funds have $191 billion of dry

powder as of October 2018—up nearly 32% since year-end 2016.

Key Takeaways

A DEEP DIVE INTO THE MIDTERMS ELECTIONS

WHAT’S NEXT….Current polls indicate that the Republicans are likely to keep control of the Senate and that Democrats will take control of the House. Regardless of who wins control of Congress, the economy is expected to remain healthy and favorable for CRE, although finding qualified employees is becoming more difficult.

2018 Midterms

• Entire House of Representatives up

for re-election

• 115th Congress major legislation:

• Tax Cuts and Jobs Act (2017)

• Bipartisan Budget Act (2018)

• Economic Growth, Regulatory

Relief and Consumer

Protection Act (2018)

• Hot issues for 116th Congress:

immigration, healthcare, tax

policy, infrastructure, and the

budget

2018 Midterm Elections

VS.

RD

2018 Midterms

• The majority party in the House

and Senate will be determined by

who wins the “toss-up” seats

(grey area)

• Those few competitive seats may

influence the policy direction in

the U.S. for the next two years

FiveThirtyEight is currently projecting:

• 6 in 7 (84%) chance Democrats

take the House

• 5 in 6 (82%) chance Republicans

maintain control of the Senate

• The number of seats that could be a “toss-

up” for the House ranges from

16 to 30

• The number of seats that could be a “toss-

up” for the Senate ranges from 2 to 9

• Most of the party composition of Senate is

set

• For the House, there are a large number

of “solid” or “safe” seats

Tracking the Midterms – Toss-up Seats Are KeyProjected Composition of Congress based on Latest Polls

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%FiveThirtyEight

Cook PoliticalReport Inside Elections

Sabato'sCrystal Ball

House

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%FiveThirtyEight

Cook PoliticalReport

InsideElections

Sabato'sCrystal Ball

Senate

Source: FiveThirtyEight, Cook Political Report, Inside Elections, Sabato’s Crystal Ball

2018 Midterms

1950

1954

1958

1962

1966

1970

1974

19781982

19861990

1994

1998

2002

2006

2010

2014

35

40

45

50

55

60

65

70

-80 -70 -60 -50 -40 -30 -20 -10 0 10 20

Ave

rag

e A

pp

rova

l R

atin

g in

3 m

on

ths P

rio

r to

Mid

term

s

Total Seats Lost in House and Senate

• Typically, the president’s party loses seats

in a midterm election

• When the approval rating for the president

or his party is lower, there is typically a

larger loss for the party in midterm

elections

• There has been a wide range of outcomes

for presidents with approval ratings below

50%, but there have been no cases with a

net gain in seats

• President Trump’s approval rating in late

October was 41%

• This suggests Republicans are

likely to lose seats, but it is less

clear if it will be enough to

change control of either chamber

of Congress

• Current polls indicate that the

Republicans are likely to keep

control of the Senate and that

Democrats will take control of the

House

Most Likely Outcome

Source: The American Presidency Project, Cushman & Wakefield Research

President’s Party Typically Loses Seats During Midterms

2018 Midterms

0

1

2

3

4

5

6

7

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Unemployed Persons per Job Opening

• President Trump retains authority to make

most trade and tariff-related decisions

• The Federal Open Market Committee is

likely to vote to raise the federal funds rate

in December, and for 3-4 more hikes in

2019

• Labor markets will remain extremely tight

and worker shortages will become more

common

• Wage growth and rising prices will create

both opportunities and challenges

• Mandatory spending continues even if

Congress does not pass a budget in a

government shutdown scenario

• Regardless of who wins control

of Congress, the economy is

expected to remain healthy and

favorable for CRE, although

finding qualified employees is

clearly becoming more difficult

What Doesn’t Change Less than One Job per Unemployed Person for First Time Since 2000

Ratio fell below 1.0

in March 2018, meaning

there are more job openings

than there are unemployed

people to fill them

Source: U.S. Bureau of Labor Statistics, Cushman & Wakefield Research

Note: Nonfarm job openings are used.

How Does the Economy Perform Before and After Midterms?

*Growth rates/returns cited in this section are 2-year CAGR;

E.g., for 2014 midterm election: 2 years prior = return from 2013-2014; 2 years after =

return from 2015-2016

WHAT’S NEXT…In years following a midterm election, the S&P 500 2-year return has been highest under a split Congress. The stock market has an important wealth effect and a positive multiplier for CRE:

Strong consumer spending equals higher business profits equals stronger job growth equals stronger demand for space

2018 Midterms

3.5%

4.0%

3.7%

4.1%

3.0%2.8%

1.4%

1.8%

2.2%

3.7%

3.2%

3.5%

2.7%

3.0%

3.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Overall RepublicanPresident &Congress

RepublicanPresident &

Senate, DemocratHouse

RepublicanPresident &DemocratCongress

Democrat President& Congress

After Midterms (Left) Before Midterms (Center) Overall Average (Right)

Republican

President &

Congress

Democrat

President &

Congress

Republican

President &

Senate, Democrat

House

Republican

President &

Democrat

Congress

• Real GDP growth has averaged 3.2%

since 1951

• Historically, economic growth has been

stronger under a unified government,

where one party controls both branches

• However, when Congress has been

divided—such as the possibility of

Democrats getting control of the House

and/or Senate in the upcoming midterm

election—economic growth has been

lower

• Real GDP growth is one of the

most important indicators for

CRE—when the economy is

growing, businesses are

expanding, driving demand for

space

• 2018 is likely to be one of the

strongest years of the expansion

and, regardless of the midterms,

that strength is likely to carry

over into 2019

Economic Growth: 2018 Likely to be One of the Strongest in this Cycle

Real GDP Growth: 82nd Congress through Present (1951-present)

Source: U.S. Bureau of Economic Analysis, Cushman & Wakefield Research

Overall

2018 Midterms

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 2018F

By Party of the Senate

• Nonfarm job growth has averaged 2.1%

year-over-year since 1939

• In periods following midterm elections, job

growth has averaged 2.1% when

Congress is split

• However, the correlation between the

party in power in each chamber and job

growth is only 0.1—essentially,

nonexistent

• Thus, we apologize for wasting your time

with this slide

• Job growth is a key driver of

demand for CRE space of all

kinds and is minimally influenced

by the makeup of Congress

Nonfarm Job GrowthJob Growth Minimally Influenced by Make-up of Congress

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 2018F

By Party of the House

Source: U.S. Bureau of Labor Statistics, Cushman & Wakefield Research

Note: Shading denotes the party of the president.

By Party of Congress (000s), 77th Congress-present (1940-2018)

2018 Midterms

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1898

1901

1904

1907

1910

1913

1916

1919

1922

1925

1928

1931

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018*

• The S&P 500 has registered an average

2-year return of 5.6% since 1898

• In years following a midterm election, the

S&P 500 2-year return has been highest

under a split Congress (12.3%); it has

averaged 4.5% under a unified

government

• The stock market has an

important wealth effect; in

the current cycle, every $1

increase in the stock markets

boosts consumer spending by

4.5 cents

• And it has a positive multiplier on

CRE: Strong consumer spending

= higher business profits =

stronger job growth = stronger

demand for space.

Stock Market Usually Accelerates After MidtermsS&P 500 Two-year Performance Before and After Midterms: 55th Congress-present (1898-2018)

Source: Standard & Poor’s, Cushman & Wakefield ResearchYears of midterm elections

2018 Midterms

0

2

4

6

8

10

12

14

1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Midterm 10-Year Yield

• Movements in inflation and interest rates

can be impacted by the business cycle but

are also influenced by longer-term

structural factors

• There is no statistical evidence

that changes in the party in the

White House or in majority in

Congress have any significance

in explaining the level of interest

rates, or inflation

• In fact, the Federal Reserve has staunchly

defended its independence no matter the

party in power

• However, over time, the Fed has become

more open about its deliberations and

policy actions and this policy of openness

is likely to continue after the midterm

elections

• Interest rates are a critical factor

influencing CRE pricing and the

level of economic activity, which

impacts demand and supply

Critical Factors Influencing the Economy and CREKey Metrics on Radar of Monetary Policymakers

Source: Federal Reserve, Cushman & Wakefield Research

During Recessions

How Does CRE Perform Before and After Midterms?

WHAT’S NEXT…

While there are some differences depending on timing and party in power, the rate of growth of CRE prices barely changes before or after a midterm election.

Historically, average NCREIF returns have been higher in periods immediately following a midterm.

2018 Midterms

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

OverallAverage

DEM REP DEM REP DEM REP Split DEM REP

Senate House Both Houses Congress &President

After Midterms (Left) Before Midterms (Center) Overall Average (Right)

• The 2-year average return for equity

REITs between 1995 and 2018 is 11.9%

(but 15.2% excluding the Great

Recession)

• Equity REIT returns tend to be higher in

the 2 years before a midterm election than

in the 2 years after

• The highest average returns, regardless

of there being a midterm election, were

observed under a split Congress:

• At the start of Clinton’s second

term (1997-1999)

• In Bush II’s last two years (2007-

2009)

• During Obama’s middle four years

(2011-2015)

• These periods are associated with

economic growth—boom periods—and/or

a low interest rate environment

• The economic and financial

market backdrop has more to do

with REIT performance than the

party in power

Stock Markets & REITs: No Sign that Party MattersEquity REIT Performance: 104th Congress through Present (1995-present)

Source: S&P Dow Jones Indices LLC, Cushman & Wakefield Research

Excluding the Great Recession,

2-year returns under

Democratic leadership

averaged more than 20%

2018 Midterms

8%

10%

12%

14%

16%

18%

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19F

Midterm Vacancy

• CRE leasing markets respond to the

economic backdrop

• However, policy can have a marginal

influence on CRE, especially via the labor

markets

• At present, development is picking up and

is expected to cause an inflection in the

supply/demand balance at the national

level

• Most construction is concentrated in a

handful of markets for both the office and

industrial sectors

• Vacancy for office/industrial will begin to

rise slowly, but sufficient demand will

allow that upward movement to be modest

in most markets

• In the last 20 years, midterm

elections have had no correlation

with turning points in the CRE

cycle—rather, turning points are

associated with changes in the

business cycle

Leasing Fundamentals: Changes in the Economic Cycle Matter Most

Midterm Elections of Minimal ConsequenceOffice

Industrial

4%

5%

6%

7%

8%

9%

10%

11%

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19F

Midterm Vacancy

-10%

-5%

0%

5%

10%

15%

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19F

Midterm Asking Rent Growth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19F

Midterm Asking Rent Growth

Source: Chicago Board Options Exchange, Cushman & Wakefield Research

2018 Midterms

2001-2007CAGR = 8.7%

2010-2018CAGR = 6.5%

18.7% aboveprior peak

0

50

100

150

200

250

300

35019

45

19

51

19

57

19

63

19

69

19

75

19

81

19

87

19

93

19

99

20

05

20

11

20

17

Federal Reserve CRE Price Index

• The Federal Reserve’s CRE Price Index

currently tracks price movements on

properties for transactions of all sizes

• Although the current expansion has seen

prices reach record highs, the speed of

appreciation has been more moderate

than in the 2001-2007 period

• CRE prices have grown faster under

Republican presidents and under

Republican leadership (united or not)

• Historically in periods after midterm

elections, when the Republicans had

control of the presidency and the Senate,

and Democrats the House, CRE prices

have grown at an average of 5.0%

• While there are some differences

depending on timing and party in

power, the story is on the far left

of the bottom chart: the rate of

growth of CRE prices barely

changes before or after a

midterm election

CRE Pricing Holds Up Just FineFederal Reserve Commercial Property Price Index, 79th Congress-present (1945-2017)

Source: Federal Reserve, Cushman & Wakefield Research

4.7%

6.5%

2.5%

8.2%

2.3%

4.5% 4.9%4.0%

0.1%

3.6%4.6%

5.7%

3.2%

6.5%

2.8%

0%

2%

4%

6%

8%

10%

All Presidents RepublicanPresidents

DemocratPresidents

United RepublicanControl

United DemocratControl

2-Year CAGR in CRE Prices

After Midterms (Left) Before Midterms (Center) Overall Average (Right)

Republican

Presidents

Democrat

Presidents

United Republican

Control

United Democrat

Control

Overall

2018 Midterms

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Multifamily

Retail

Industrial

Office

After Midterms Before Midterms Overall

• While returns have performed better

under a Republican Senate, they have

also been higher under a Democratic

House

• The best performance for NCREIF returns

for all asset types has occurred when

there is a Republican president and

Senate and a Democratic House—both in

general and after midterm elections

• According to most polls, this is a highly

expected outcome for the 2018 midterm

election

• Historically, average NCREIF returns

have been higher in periods

immediately following a midterm

election

NCREIF Returns by Asset Class Before and After Midterms96th Congress-present (1979-2017)

Source: NCREIF, Cushman & Wakefield Research

CONTRIBUTORS

KEVIN THORPE

Chief Economist

Global Head of Research

kevin.thorpe@cushwake.com

@KThorpeView

REBECCA ROCKEY

Vice President

Americas Head of Forecasting

rebecca.rockey@cushwake.com

@beckywflyhair

ROB MILLER

Director

Americas Forecasting | Capital Markets Research

rob.miller@cushwake.com

KEN McCARTHY

Principal Economist

Americas Head of Applied Research

ken.mccarthy@cushwake.com

@KenMcCarthyecon

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