Well… we made it through the election. At a high level I batted 50%. I had hoped for a clear winner to eliminate any room for election denialism (aside from Pennsylvania of course). Secondly, I was really hoping for a divided government, which of course I did not get. Historically, looking backwards through various administrations, nearly all bad legislation arises when one party controls both chambers and the presidency.
There are all sorts of analysis as to why the Democrats lost the election (or why Trump/Republicans won the election, depending on one’s perspective) – and what adjustments should be made over the next two years, and before the next election (this line of questioning feels ironic, given campaign rhetoric suggesting a Trump victory might eliminate future elections). While many answers to these questions seem obvious, one crucial point has been overlooked: what was it about the Democrats’ messaging and/or actions that led so many voters to misrepresent their voting intentions in pre-election polling? Only the day before the election, candidate Harris announced that she had ascended from being underdog to the favorite, and then promptly got wiped off the map. The polls were not merely inaccurate – they were historically off, even compared to previous Trump election cycles. Way, way, (way!) off. Voters should not be afraid of answering polling questions honestly.
And this leaves us with another four years of a Trump administration whether we like it or not. Undoubtedly, the outcome of the election will have significant implications for us as investors and/or business owners.
The president-elect has wasted no time in starting his appointments. Elon and Vivek to oversee DOGE? Absolutely love it. There is no cost to the government (i.e. taxpayers) to have two brilliant business minds review spending and regulations. Will it lead to change? Who knows, but if not, we are no worse off than we were in the past. But the potential upside is immense. In our business we frequently encounter government. The inefficiencies, ineffectiveness, and the cost on society cannot be understated. Historically small business and entrepreneurship has been the growth driver of the US economy, but recent administrations have seen a negative business birth-to-death ratio. Regulations are a major factor, as compliance costs disproportionately burden small businesses while favoring large organizations. Think about the most regulated industries in the economy, utilities as an example. Those industries are also the absolute worst to deal with. Further discussion follows below.
Moving on… Rubio as Secretary of State? Reasonable. Scott Bessent as Treasury Secretary? From the little I know of him; I like the choice (he doesn’t like debt). JFK Jr. as Secretary of Health and Human Services (HHS)? A little quirky, but not unexpected. After all, he was an Obama finalist to head the EPA. Tulsi Gabbard as Director of National Intelligence? Uh… interesting, but I can at least find humor that someone on the NSA watchlist is now overseeing that same department. Gaetz as Attorney General? WHAT? Are you kidding me? This has to be the worst appointment in the history of appointments. Not only is his ethical bearing highly questionable, after four years of lawfare aimed at Trump, is there anyone less likely to turn that lawfare around the other direction. Perhaps this is what the president-elect intended. But more than anything else, Gaetz’s lack of legal and professional experience makes him grossly unqualified to manage such a critical department. The news that he was withdrawing from consideration was a relief, though it doesn’t diminish the asininity of the selection in the first place. Linda McMahon as Secretary of Education is only slightly less of a gobsmack. Among others.
All these appointments, pending Senate confirmation (or their replacements if not confirmed), will have a direct influence on our lives, and certainly our investment decisions, through the decisions they make in managing their respective departments. However, the most significant impacts are likely to come from decisions made or championed by the president himself. What could those decisions look like? The following points are listed roughly from least to most significant in terms of economic impact:
- 1031 Exchanges: The Biden Administration made multiple attempts to eliminate the 1031 deferred exchange provision. These exchanges (1031s as they are called) are a tax provision specific to real estate since President Trump eliminated other tax deferred exchanges with the passage of the 2017 Tax Cuts and Jobs Act. If Biden was removing the exchange provision as part of simplification and flattening of the tax code, I am in philosophical alignment with the move. However, the elimination should only be pursued with full acknowledgement of the potential for significant unintended consequences. Candidate Harris did not clarify her stance on the matter, but it’s reasonable to assume her policies would have aligned with Biden’s. This issue is now off the table for the next four years.
- QOZ/Extension of Jobs Act: Some parts of the Jobs Act were pretty well done. Lower-income tax brackets received more substantial tax cuts compared to higher brackets, while higher earners faced increased taxation through the removal of deductions – most specifically, the removal of the SALT deduction – and the QOZ provisions. At Altus we love the QOZ provisions and believe it has been a tailwind for getting buildings constructed in areas that may not have otherwise benefited from the investment and improvements. The QOZ provisions, and specifically the original tax deferral period, are sunsetting in 2026 (the carry-on requirements and benefits of QOZ investments already made will continue). There is now a strong likelihood that the QOZ provisions will be renewed with a reset of timelines, which will reopen the window of opportunity that otherwise closes within months (note: Altus currently offers a QOZ investment opportunity with available capacity).
- Taxation changes: – Who knows what this looks like or what will actually make it through Congress, but there are a few things that are expected to be pursued:
- Removal of taxation on tips – This was widely seen as a blatant attempt to “buy” votes; that was quickly parroted by the Harris campaign. Realistically, most earners relying heavily on tips already pay minimal income taxes. However, this policy would reduce contributions to programs like Social Security and Medicare, potentially affecting their long-term funding.
- Removal of tax on overtime pay – This presents an interesting dilemma. While I philosophically oppose tax provisions that favor specific groups, I find this one appealing in practice. Those who work overtime are often penalized for their extra effort as their additional earnings push them into higher tax brackets. We should encourage and reward extra effort, not create financial obstacles for it.
- Inheritance Tax – There is currently an inheritance tax exemption of up to $13.61 million of lifetime gifts and inheritances. This exemption is set to sunset on December 31, 2025, after which it will be roughly cut in half unless extended. It is hard for me to swallow taxes on inheritance since the value of the inheritance has (in most cases) already been taxed during the giver’s lifetime. However, for most people, the debate is irrelevant. Only ~5% of US households have over $7 million in wealth, and if those households have two partners/spouses, or multiple children, the amount of tax-free giving is substantially more than $7 million. Meanwhile, ultra-wealthy families – those most affected by inheritance taxes – rely on other provisions in the tax code to eliminate or minimize their exposure anyway. While the tax exclusion debate creates attention grabbing headlines, Congress has left plenty of other loopholes in the tax code to ensure wealth can still be passed on to heirs.
- Immigration: It is hard to argue with the stated first order of business of the new “Border Czar” – deporting all non-document immigrant criminals back to their home country. Most wouldn’t argue with tightening up the border (the Democrats put forth a bill this year to do so). But when we move further along the spectrum to eliminating immigration or sending back Dreamers, the discussion gets a lot more controversial. The new administration has signaled a desire to make it easier for foreign college graduates to stay in the country after graduation and have a clear path to citizenship. I think this is a great idea. Yet, I struggle to align with their other proposed measures. As we have discussed in previous Insights, immigration is not only a key part of our DNA as a country (we are almost all immigrants at some point in our history), but it is a key part of our economy. Unemployment is only slightly over 4%. We have a huge shortage of housing across the country and food costs have risen considerably more than the overall inflation rate. There is nothing about reducing immigration – and especially sending working folks back to their home country – that is going to help those problems. There are so many ways to solve the immigration problems beyond the current rhetoric. If, with a full sweep of federal government, some of the more draconian measures are able to be shoved through, it will be a huge inflationary tailwind. For our business specifically, it could momentarily reduce apartment demand, but over time, it would lead to both tightening supply and increasing rents.
- Tariffs: I firmly believe in free trade. Our country, and the world more broadly, has seen massive improvements in living standards that can be directly linked back to increased global trade. But – and it is a big but – for trade to be free, it needs to be reciprocally free. The structures with some of our main trading partners are far from a level playing field. Leveling that field with a non-cooperative counter party is not easy, quick, nor painless. Add in the geo-political issues that can exist (and certainly do with China), and making trade “free” is very difficult. The blunt tool the new administration is planning on using is tariffs. Starting with the original Trump administration and continued under Biden, tariffs have been used with increasing force. The new tariff threats, if enacted, will be (yet another) tailwind for inflation, as the costs of onshoring/nearshoring are passed through to consumers. Certain types of industrial real estate are a little overbuilt currently, but with building costs having increased so dramatically over the past few years, and demand almost certain to re-accelerate, industrial real estate will likely be re-established as the institutional real estate darling. At least I am hopeful this is the case. We have a very large and empty industrial property, and any uptick in demand would be much welcomed.
- Rent Control: Rent control is a terrible idea, and blanket rent control, like any type of economic controls, is an even worse idea across regions, economies, and various levels of cost of living. The current administration has had a lot of really bad ideas, but national rent control was one of the worst. Areas where it is easier to build have more supply, more supply means lower and even falling rents. This is true even in the face of substantial population growth. Dallas, Phoenix, Austin, Raleigh Durham and other high growth and high construction markets are perfect examples of an open economy at work as the flood of supply. We have discussed rent control in previous Altus Insights. Nothing has changed, except that the new administration is highly unlikely to continue to push on this idea.
- Regulations: As already mentioned, there is a distinct possibility of a reduction in regulations. During Trump’s last term, while regulations continued to increase, they did so at a much slower pace compared to prior and subsequent administrations. This reduced regulatory burden (on a relative growth basis) was a real tangible benefit to the real economy. We have written about regulations on many occasions here in the Insight. Regulations usually start with good intentions, but with the unintended consequences ignored and never revisited. We have ended up with a labyrinth overlapping and often contradictory regulations that have had the effect of strangling growth and innovation. Do you know it takes longer to build a house now than it did thirty years ago? Or that there are ten people in health care for every single provider? How is this even possible? And those are just two simple and obvious examples. Why have we seen so much advancement in tech versus other areas? Tech is one of, if not THE, least regulated industries in the economy. Haters are already pointing out that even if we completely eliminated regulation, it would only save “x” of the government budget. These cynics are completely missing the point; or are supporters of the “nanny state” to start with. The real benefit of cleaning up regulations is not the saving of taxpayer money (though I won’t complain), it is the unshackling of innovators and entrepreneurs. It could, maybe, possibly be that unleashing the American spirit will not only improve quality of life (which has incredibly been declining over the past several years), but also serve as a counterforce to all the inflationary pressures mentioned above.
It is very possible that all of this deregulation talk ends up being much ado about nothing, but even if that’s the case, it will be no real loss to the economy. Those leading this effort are not charging anything for their time and effort. And based on what else they could be doing with that time, it is a hugely valuable contribution to society. However, if they do manage to achieve meaningful progress, I have to admit, I am excited about the potential outcomes.
It’s reasonable to anticipate that the next four years may mirror aspects of the last Trump administration. In some ways, that is probably true – it will probably remain a circus, and I am sure there will undoubtedly be moments when I am embarrassed that our country has chosen this man to be our commander-in-chief. In other ways, these next four years may be quite different. Regardless of the similarities or differences, the election was probably good for investors (at least in the short term) and we will almost certainly have more entertainment and volatility supplied by the office of the President than should be the case.
Happy Investing.
