What the Upcoming Midterms Mean for the Rental Housing Industry
The 2022 midterm elections are right around the corner and uncertainty over the potential outcome looms as a result of slim margins in both chambers of the U.S. Congress. Currently, The Democratic party narrowly controls the Congress with 220 seats in the House, while Republicans hold 212 seats. In the Senate, there’s a 50/50 split with Democrats holding control due to the Vice President’s tie-breaking vote.
As we proceed into the midterms, major areas of legislative debate include affordable health care, affordable housing, climate and environment policy, energy policy, and state budget surpluses. The results of key individual races and control of Congress will shape the direction of the national legislative agenda over the next two years.
The possible outcomes of the election are either a Democratic congressional majority, a Republican congressional majority, or a split government with either Republican Senate majority and Democratic House majority or Democratic Senate majority and Republican House majority. Whatever the results are, we can be certain that there will be implications for the rental housing industry.
Why the Midterms Matter to the Rental Housing Industry
It is likely the results of the election will shape housing policy for the next two years according to the National Apartment Association (NAA). Legislative policies concerning rental housing acquisition, development, and operations are a big concern for industry stakeholders. Whether there are to be maximized efforts of federal investment on rental housing, expanded access to affordable housing, prioritization of policies that accommodate affordable and market-rate housing projects, or removal of bureaucratic barriers that hinder industry operation is dependent on the political landscape post-midterms.
It is unclear whether bipartisan bills like the Build More Housing Near Transit Act (H.R.2483), The Choice In Affordable Housing Act (S.1820) and The Yes In My Backyard (YIMBY) Act (S.1614/H.R.3198) would receive necessary support and funding. All three bills seek to address barriers to creating a more equitable housing landscape across the country by removing discriminatory land-use policies and encouraging more development when the country is struggling with a structural shortage of housing, which threatens to make housing even more prohibitively expensive for renters in the future.
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Come election night, should Democrats retain control over the Senate and House, we would likely see the current administration proceed to advance items on its domestic social policy agenda which should include passing further legislations aimed at expanding the social provisions of the Inflation Reduction Act (IRA).
The IRA clean energy initiative includes energy efficiency tax incentives for rental housing providers and $837.5 million for the Department of Housing and Urban Development (HUD) to provide grants or loans to affordable housing owners. Provisions in the IRA include the extension of the 45L credit, meaning an increase of the maximum tax credit value developers are to receive for every energy efficient housing unit within their buildings, from $2,000 to $5,000. Additionally, investors would be able to take advantage of a 30% tax credit which will be applied to charging infrastructure up to $100,000 per item of property provisions. Furthermore, the package will allocate $330 million in grants to help states adopt the most recent residential and commercial building energy codes.
Here’s What to Expect with a Democratic-Led Congress:
- Furthering of rental housing policies that place limits on the ability to collect rents. i.e. rent stabilization and rent control policies
- Greater potential liability on developers and owners for environmental contamination
- Potential increases in compliance costs associated with numerous federal, state, and local laws and regulations
- Changes in tax rules and regulations that may affect the ability for owners to reinvest sale proceeds in a manner that generates favorable returns as 1301 exchanges may become a target for repeal or limitation
- Further tax increases on corporations
If indeed the 2022 midterm election follows precedent as a referendum on the incumbent leadership, voter dissatisfaction about sticky inflation and a slowing economy will play out against the Democratic party, likely leading to a handover of leadership to the GOP.
The Republican party gaining control of Congress, as some speculate, should have some favorable tax policy, regulatory and government spending implications for the industry. We expect a great deal of coordination on the legislative agenda, however, with President Biden holding veto power, most proposals will probably die. This outcome virtually guarantees greater regulatory action by the executive branch and additional Congressional oversight of those activities.
Even as interest rates surge and reducing liquidity in financial markets drives borrowing costs higher around the world, we can anticipate limited government policy help for inflation under a Republican-led government (Wells Fargo Investment Institute). Aggressive credit tightening by the Federal Reserve will be the main anti-inflation weapon, dampening demand and exposing the economy to a recession. The rental housing industry may have to brace itself for further volatile interest or capitalization rates and unstable capital market conditions.
Here’s What to Expect with a Republican-Led Congress:
- Attempts to advance key parts of the previous administration’s tax cuts, lowering corporate taxes to benefit investors; however, further inflationary activities may contribute to already-rising operating costs.
- Lower compliance costs associated with limited federal, state and local laws and regulations
- Potential financial re-regulation as the Biden administration leans more heavily into wielding executive powers
Based on numerous projections, an era of endless political gridlock may be imminent with the high probability of a divided government post-election. If indeed Democrats hold on to the Senate come election Tuesday, and Republicans seize enough seats in the House to take control, it could mean fewer but also less controversial laws being passed.
Under this scenario, House Republicans would be alone in pursuing their agenda and would likely end up seeing most proposed bills die at the doors of the Senate. The Republican agenda would include conducting aggressive oversight and moving forward with budget cuts for federal agencies, potentially including HUD. As a result, it is expected that the President will pivot to federal regulatory powers to implement his agenda once the legislative route is shut.
Here’s What to Expect:
- A divided government means greater predictability and fewer surprises in the legislature, something that the equity markets typically favor. However, this outcome makes bipartisan action against inflation very difficult.
- Policy initiative targeting housing supply issues will rely heavily on compromise between the Democrats and Republicans.
- Concerning the housing sector, a component of the original reconciliation which includes billions of earmarked funds for the construction, renovation and purchasing of affordable public housing would be unlikely to move through a Republican majority House. Republicans may either refuse to fund or underfund the Federal Housing Agency if they seize control of just the House.
- Democratic efforts to enact broader climate policies and social programs through legislation, such as pushing for renewable energy development, will not see much success.
Why the States’ Races Matter for the Industry
The state elections across several states are also a big factor at play during the upcoming midterm, particularly in toss-up states like Arizona, Georgia, Nevada, Pennsylvania, and Wisconsin.
Following the elections, state governments are expected to remain largely Republican-controlled. Many state governments are focusing on increasing access to affordable housing. Politicians in Arizona have recently proposed laws that uncap the number of units allowed in affordable housing projects and mandate a large portion of unclaimed property revenue be put toward the Housing Trust Fund.
However, because laws favoring affordable housing creation and maintenance are traditionally Democrat-leaning, it is probable that housing supply will continue to fall short of demand as residential supply is likely to not find government support up to par with housing demand.
Apartment real estate investment trusts (REITs) and the rental housing industry stand to benefit from supply shortfalls in the residential market. Strong demand for apartment housing across the Sunbelt and Mid-America markets following steady growth in jobs and wages, along with positive new household formations and migration trends across markets, fuels a growing need for housing.
Some population redistribution ahead of the 2024 elections should be expected as a result of tax migration induced by a change of party leadership on the state level. In states with new Republican leadership, the legislatures might take the budget surplus as an opportunity to decrease taxes, convert to a flat income tax, or remove the income tax altogether. This would attract wealthy residents into the state as investors chase tax benefits.
States to hold Democratic leadership are likely to spend extra money on environmental protection efforts and green energy, providing an opportunity for environmental, social, and governance (ESG) investments. The extra money comes from the earlier injection of stimulus through the series of COVID-19 response bills and the distribution of funds from the Infrastructure Investment and Jobs Act which have boosted total balances to record highs.
Presently, the legislative outlook as it relates to the rental housing industry is still heavily speculative. Come Tuesday, November 8th, 2022, as Americans take to the polls to elect local and state representatives, a clearer picture will become apparent as to what the next two years might look like for the industry.