The U.S. midterm elections are now largely decided, and the result was even more decisive than expected.
Democrats won control of both the House and the Senate, meaning that President Trump will now face an opposition-controlled Congress for the final two years of his term. Democrats also made unusually strong gains in several states that had previously leaned heavily Republican, including Texas.
I don’t want to get into the politics of this because that is not what we are here for. What matters to us is how the result could affect interest rates, inflation, economic growth, regulation, and ultimately REIT valuations.
My initial view is that the result is probably a modest positive for REITs overall, mainly because it increases the likelihood of political gridlock and potentially reduces the odds of another large deficit-funded fiscal package.
That said, the implications are not identical across property sectors. Some could benefit more than others, while a few may face new risks.
The Most Important Impact: Lower Treasury Yields
The biggest issue for REITs remains interest rates.
As I have explained repeatedly in recent weeks, the main reason REITs have sold off is not that their fundamentals suddenly collapsed. It is that interest rates surged.
The 10-year Treasury recently moved back toward 5%, dramatically increasing the required return on all income-producing assets. If investors can earn roughly 5% from Treasuries, REITs need to offer higher yields as well, and their share prices decline until those yields become sufficiently attractive.
This is why even high-quality REITs with growing rents and cash flows have been hit so hard.
But the reverse is also true. If long-term Treasury yields decline, REIT valuation multiples can expand very quickly, and the impact is particularly powerful for REITs with long-duration cash flows.
The midterm result could help on this front because we are now heading into a period of divided government. Democrats control Congress, but President Trump remains in the White House and retains veto power. That makes it much more difficult for either side to enact a large new fiscal agenda without compromise.
This does not mean that federal deficits are suddenly going away. They won’t. There will also likely be more conflict around budgets, the debt ceiling, and spending priorities, and that could occasionally increase market volatility.
But all else equal, gridlock reduces the probability of another very large package of tax cuts or spending that would require substantial additional Treasury issuance.
For REITs, this matters a lot.
This is why I continue to believe that the interest rate impact of the election is far more important for REIT investors than the political headlines themselves.
