Executive Summary

  • The 10-year Treasury yield exceeded 1% for the first time since March, indicating the market's expectation for greater government spending and inflation.
  • President-elect Biden now can carry out larger portions of his agenda, including selective tax hikes, social programs and environmental regulations. There will be direct and indirect impacts on the property market, but any impacts on values and rents likely will be muted. During his campaign, Biden called for elimination of the 1031 exchange, but its demise is far from certain.
  • There is some upside potential to CBRE's near-term economic forecasts from higher government spending.
  • Despite the chaos that unfolded in the Capitol yesterday afternoon, with Senate control now determined and Biden poised to be inaugurated on Jan. 20, federal political uncertainty will start to ease.
  • CBRE continues to expect strong economic growth in 2021 as COVID vaccines are more widely distributed, which should usher in the beginning of a general recovery in property markets.

Policy Impacts

Democrats will gain control of Congress thanks to a sweep of the runoff election for two Senate seats from Georgia. Vice President-elect Kamala Harris will cast tie-breaking votes in the evenly split (50/50) Senate. Consequently, the legislative agenda will be controlled by Democrats and likely will include increased taxes for higher earners and more government spending. Nevertheless, Biden’s agenda likely will be checked by very narrow voting margins in both the House and the Senate and by Senate rules requiring 60 votes to advance most major legislation outside the budget process.

Over the near term, there likely will be legislation to increase the amount of direct economic stimulus payments to Americans to $2,000 from the current $600. There may be some limited amounts of state and local aid, and enhanced unemployment benefits may also be extended beyond the first quarter of 2021. All combined, possible additional COVID-relief legislation could total more than $500 billion.

Some degree of tax increases also may be attempted, but likely will be tempered by tight voting margins in the House and Senate. This includes the 1031 exchange, which historically has been spared from tax code changes. Spending priorities with bipartisan support, such as infrastructure, will have an easier time making the legislative agenda. Environmental legislation, including money to support Biden’s goal of retrofitting 4 million buildings, could also be passed.
All of this may slightly increase interest rates, resulting in higher hedging costs for foreign investors. This was evidenced overnight on Tuesday with the yield on the 10-year Treasury exceeding 1% for the first time since March 2020.

Figure 1: Biden Spending Priorities

brief-marketflash-democrats-gain-senate-control-figure-1 Source: Penn Wharton Budget Model, University of Pennsylvania, September 2020.
Notes: For PWBM's long-term macroeconomic modeling, all of Biden's provisions for new spending on education, social security benefits and health care (spending and drugs) are assumed to continue past 2031. Some housing assistance provisions and all infrastructure and R&D provisions end in 2031. Paid leave is not incorporated into PWBM's macroeconomic modeling.

Figure 2: Biden Plan Revenue Sources

brief-marketflash-democrats-gain-senate-control-figure-2 Source: Penn Wharton Budget Model, University of Pennsylvania, September 2020.

The Bottom Line

Democrats will control the legislative agenda for the next two years. However, they will need Republican support to pass large pieces of legislation due to Senate rules requiring 60 votes—outside of the budget process—to break a filibuster. President-elect Biden’s agenda includes greatly increased revenues (taxes) from businesses and high-income earners, as well as increased spending on social and environmental initiatives—all which would have significant implications for property markets.

Additional fiscal support for the economy carries upside potential for CBRE’s current forecast of 4.5% GDP growth in 2021. This will hasten near-term recovery in property markets, while other policy changes may create headwinds for certain sectors (e.g., luxury retail and traditional energy) over the longer term.