Commercial real estate has always been a hot commodity, and with the current state of the economy, it is more important than ever for businesses to understand the role of government in this market. In this blog post, we will discuss the impact that government has on commercial real estate, and how you can make sure that your business is prepared for whatever changes come next!
Government policies not only keep the corporate environment healthy, but they help stabilize the economy and influence decision-making. Policies are developed in consultation with industry professionals because they reflect the interests of various stakeholders.
- The government fights inflation by raising taxes and rising interest rates, however, this typically dissuades people from buying or investing in commercial property markets.
- Real estate is financed and spent by the government every day. Loan guarantees and business tax advantages are influenced by the federal government.
- Providing rent assistance, homebuyer assistance, and funding for commercial development are some of these initiatives.
How Government Impacted Commercial Real Estate?
The government’s role in housing is to provide a mix of subsidies and levies to encourage the building and preservation of affordable housing. This can happen at several levels, such as federal, state, or municipal, depending on the demands of each jurisdiction.
The federal government’s activities are primarily supported by taxation and subsidies. This can take the form of direct subsidies, such as rent support for low-income renters, or indirect subsidies, such as tax breaks for developers who construct affordable housing.
Aside from ordinary tax revenue, the federal government receives financing for housing assistance programs such as the Community Development Block Grant (CDBG) and HOME from two other sources.
States and localities will have greater alternatives to handle their area’s particular housing requirements as a result.
State governments have a significant influence on housing. They make homeownership more affordable through mortgage revenue bond programs and can pick where to distribute their CDBG, HOME, and other federal money throughout the state, providing them flexibility in how those dollars are used.
States compete for Low Income Housing Tax Credits (LIHTCs), the primary source of funding for new and rehabilitated rental dwellings. Some states have housing trust funds or other community development systems in place.
States can encourage communities to adopt policies that increase the number of affordable housing by providing incentives or requiring it. States, in addition to serving as conveners and instructors in this process, also serve as facilitators through enhanced enabling legislation.
Local governments have an important role in determining the availability of housing options in their respective locations. They exercise their influence in a variety of ways, including zoning policies and new development approvals.
Certain areas gift land or property to persons who have fallen behind on their taxes, while others donate money from the community to build dwellings for needy families.
There are over $228 trillion in real estate assets, and over 500,000 people are employed in the industry directly or indirectly. This makes real estate the world’s largest illiquid asset class. Governments are supporting the sector with significant amounts through COVID-19.
Direct financial support of landlords (via payments to tenants) has ranged from indirect assistance, such as rent deferrals, to modifications of eviction procedures.
Maintaining stability affects renters, landlords, building values, property taxes, safety and security, and overall quality of life.
In a post-vaccination economic recovery, what can governments, landlords, and tenants do differently to improve the effectiveness of these stimulus initiatives?
Throughout the world, a variety of programs are evaluated, their effectiveness and second-order distortions examined, and recommendations are made to help the sector recover from COVID-19 and succeed in the future.
If you want to be a successful investor in commercial real estate but don’t know where to start, I have written the basics about it here, make sure to check it out!
What is the government’s primary objective with regard to real estate?
Real estate is financed and spent by the government every day. Loan guarantees and business tax advantages are influenced by the federal government. Providing rent assistance, homebuyer assistance, and funding for commercial development are some of these initiatives.
Real estate, neighborhoods, are very prevalent in the US. The real estate industry spends $450 billion annually. Using direct consumer spending, taxation, and loan commitments, Smart Development America analyzed 50 federal real estate programs. Spending on tax expenditures, loan guarantees, and other types of spending is included in the analysis.
Furthermore, the report examines low-interest loans, loan guarantees, and tax expenditures. Also excluded are non-real estate expenditures by Government Sponsored Enterprises (GSEs). Infrastructure investments, for instance, have a significant impact on development. The U.S. real estate industry is directly and indirectly influenced by a variety of factors despite its reputation as a “free” market. It is necessary for the government to intervene. The effects of zoning, infrastructure, and other factors have been extensively discussed.
Subdivision restrictions and local approval processes contribute to the real estate market’s volatility. In addition, GSEs have played an outsized role recently more than just supply and demand.
Stimulus Programs during Covid-19 and Before
What do these stimulus programs look like?
In comparison to hyper-local support, federal funding has come mostly from federal sources. Direct federal funding is usually time-limited and targeted, rather than being widely available. Businesses have gotten stimulus checks that allow them to redirect scarce funds to non-employment needs, while tenants have received checks to continue paying rent or mortgage debt.
During the COVID-19 epidemic, landlords received forgiving loans covering 50% of the rent, 25% of the tenant’s rent, and 25% of the landlord’s rent. Furthermore, eviction notices can now be served more quickly. COVID-19 had a varying revenue impact, prompting the Canadian government to implement a second rent reduction scheme.
The UK government imposed a moratorium on business lease evictions, requiring landlords to prolong notice periods before eviction. Landlords in France obtain a tax credit equal to 50% of the rent waived for business tenants with fewer than 250 employees. In Germany, tenants can postpone lease payments until 2022.
In addition to direct financial assistance, many governments are promoting green building retrofits. The Canadian and French governments have pledged 2 billion Canadian dollars, 7 billion euros, and 3 billion pounds for building retrofits.
Are these programs effective?
It is important to examine two metrics to determine whether stimulus programs targeted at the real estate sector have had a positive effect: the percentage of landlords and tenants who participated in these programs, as well as the impact on vacancy rates, rent rolls, and, ultimately, asset values. Consideration should also be given to the distortions that stimulus efforts may cause in the economy.
Other government policies affecting commercial real estate
As a primary source of revenue, most local governments in the United States levy a property tax, also known as a millage rate. This tax may be levied on real estate or personal property. The tax is almost often estimated as the fair market value of the property multiplied by an assessment ratio multiplied by a tax rate and is generally a duty of the property owner.
Local government decides values, which can be challenged by property owners. One advantage of the property tax over the sales tax or income tax for the taxing authority is that the revenue always equals the tax levy, unlike the other taxes. Property taxes typically generate the required revenue for municipal tax levies.
Speaking about hot markets, certain areas are simply more desired than others. Places like Nashville and Boise, formerly overlooked in fly-over states, are now among the fastest-growing towns in the country, and Texas has seen particularly rapid growth as people escape more expensive places like New York and San Francisco.
Taxes are a frequently claimed rationale for relocation to Texas, particularly when CEOs justify relocating their entire firm. California has a variety of legislative policies that some see as anti-investment and job-killing, whereas Texas has low taxes, plenty of lands, no income tax, and has historically been quite welcoming to new businesses. Local politics can make a significant impact in influencing large corporations to relocate.
Infrastructure and Transportation
The quality of the local infrastructure and transportation are significant site selection factors for businesses. The existence of an airport, seaport, or major highway can be a game-changer when it comes to where a business will locate.
In addition to being able to move products in and out quickly and efficiently, businesses want employees to be able to get to work easily as well. Good public transportation, especially if it is close to where people live, can be a major selling point for a company looking to relocate.
The state of the local roads and bridges is also something businesses consider when making a move. Poorly maintained roads can impact not only the quality of life for employees but also the bottom line for businesses.
Energy Efficiency and Sustainability
As sustainability becomes an increasingly important issue for businesses, energy efficiency and sustainability are becoming more significant site selection factors. Businesses are looking for locations that offer access to renewable energy sources as well as opportunities to reduce their carbon footprint.
Governments can play a role in making their jurisdictions more attractive to businesses by implementing policies that encourage energy efficiency and sustainability. Incentives for businesses to adopt sustainable practices, such as electric vehicle charging stations and solar panels, can make a jurisdiction more appealing to environmentally conscious businesses.
Another element that might have a significant impact on property demand and pricing is legislation. Tax credits, discounts, and subsidies are just a few of the ways the government might temporarily boost demand for real estate. Being aware of current government incentives can assist you in determining changes in supply and demand as well as identifying potentially false trends.
For example, in 2009, the United States government introduced a tax credit for first-time buyers in an effort to stimulate sales in a slowing economy. The tax break was used by 2.3 million people, according to the Government Accountability Office.
This was a significant gain, albeit temporary, and if you didn’t know it was due to the tax break, you might have concluded that real estate demand was increasing due to other circumstances.
We have to consider how government law and regulation might impact demand for a particular type of property. New environmental regulations, for example, could lead to the demolition of older buildings that don’t meet the new standards.
Government policies can also influence the amount of development in an area. Zoning laws, building codes, and impact fees are just a few of the ways governments can control development. By making it difficult or too costly to develop the property, governments can limit the amount of new construction, which can lead to increased demand and prices for existing buildings.
Political instability is another risk to consider when looking at properties in other countries. Coups, revolutions, and changes in government can have a significant impact on the economy and, as a result, the demand for commercial real estate.
When making investment decisions, it’s important to be aware of how government policies might impact the market.
Interest Rates Hikes
Interest rates also have a significant impact on real estate markets. If you’re thinking about buying a real estate with a mortgage, it’s a good idea to look into interest rates using a mortgage calculator. Interest rate fluctuations can have a significant impact on a person’s ability to purchase a home. This is because as interest rates fall, the cost of obtaining a mortgage to buy a home falls, resulting in increased demand for real estate, which drives up prices.
Some governments have implemented policies to control the rent that landlords can charge tenants. This is done in an effort to make housing more affordable for low- and moderate-income people. While this might seem like a good idea, rent control can actually have some negative consequences.
By artificially keeping rents low, demand for rental units can increase, which can lead to a decrease in the supply of rental units as landlords convert their properties to other uses or decide not to rent them out at all. This can lead to an increase in rents for units that are not subject to rent control, as well as an overall decrease in the quality of rental units.
It’s important to be aware of how rent control might impact the market for commercial real estate before making investment decisions.
Inflation Reduction Act
In order to control inflation, the government might raise taxes or interest rates. This can have a negative impact on real estate markets as it can make it more difficult for people to afford a home or invest in commercial property.
A decrease in inflation can also have a negative impact on real estate as it can lead to a decrease in demand for real estate and a decrease in prices.
Strategies for Local Governments to Spur Commercial Real Estate Growth
Offering Incentives for Affordable Commercial Developments
Local governments could stimulate the commercial real estate market by providing incentives like tax credits and fee waivers to developers creating affordable commercial properties. This helps expand affordable options for small business owners and drives further private investment.
Investing in Infrastructure and Transportation Improvements
Upgrading infrastructure like roads, public transit, utilities, and digital connectivity near commercial areas makes those locations more enticing for companies looking to set up shop. Strategic public infrastructure investments signal positive growth conditions to commercial real estate decision-makers.
Simplifying Permitting and Approval Processes
Lengthy, complex permitting and approval procedures can discourage new commercial real estate projects. By streamlining these bureaucratic processes without compromising oversight, local governments can facilitate increased construction and sales of commercial properties.
Government Impact On Commercial Real Estate FAQs
What is the role of government in real estate development?
As communities adjust their approach to real estate, real estate is beginning to take on a variety of responsibilities. Real estate today plays an important role in public/private collaborations, workforce development, blight reduction, and actual quality of life, rather than just delivering services or producing cash.
Local politicians are starting to realize how they can influence change in their society by owning certain parcels of land. They can better manage what happens with the property if they own it, have an option on it, or otherwise have control over it.
Communities are buying property at record levels, and not just for public works projects. This site is being used for blight removal, public/private partnership bargaining tools, private for-profit ventures, housing initiatives, workforce development projects, and quality of place enhancements.
Is the commercial property a good investment in 2023?
Definitely! a commercial property is a good investment in 2023.
There are several reasons why this is true. First of all, there is a growing demand for commercial space. In fact, there has been a steady increase in demand. This means that there will be more people who want to rent or buy commercial properties in the future than there were in previous years.
What are the four factors that influence value in real estate?
Regulations and legislation, socioeconomic difficulties, demographics and population statistics, and future technology are the four key factors that influence residential and commercial real estate. Government policies are an important factor to consider when investing in real estate.
Do government controls affect the demand or supply of real estate?
Tax subsidies, Policy changes, and other government-induced legalities can positively or negatively impact the real estate market.
Why is it important for the government to protect property?
The main goal of property rights is to stop violent competition for economic resources. When these rights are well-defined and protected, it allows peaceful competition takes place instead.
The government has a significant impact on the commercial real estate industry. While some of its actions can be beneficial, others can have a negative impact. It’s important to be aware of how the government might affect the market before making any investment decisions.
I hope this article has helped you to better understand how the government can impact commercial real estate sales. If you have any questions or would like to discuss your situation further, please don’t hesitate to give me a call or schedule a free consultation I’d be happy to talk with you and offer my professional insight.
Blog Articles Disclaimer
The information presented in articles on our website or affiliated platforms is exclusively intended for informational purposes. It’s crucial to grasp that this content does not constitute professional advice or services. We strongly recommend our readers to seek guidance from appropriately qualified experts, including, but not limited to, real estate and other attorneys, accountants, financial planners, bankers, mortgage professionals, architects, government officials, engineers, and related professionals. These experts can offer personalized counsel tailored to the specific nuances of your individual circumstances. Relying on the content without consulting the relevant experts may hinder informed decision-making. Consequently, neither Tolj Commercial Real Estate nor its agents assume any responsibility for potential consequences that may arise from such action.