The divided Congress resulting from the 2018 mid-term elections created uncertainty for the economy, along with social and environmental issues, heading into 2019.
With the Democratic takeover of the U.S. House of Representatives in January, the course of government is set to change dramatically. Legislation such as the Tax Cuts and Jobs Act of 2017 won’t sail as smoothly from the House to the Senate and into the West Wing for President Donald Trump’s assured signature.
With control of House committees, the Democrats are poised to introduce legislation that suits their constituents, not to mention the subpoena power to investigate the president and his administration.
Immediately following the election, the Democrats were in virtual lock-step in their talking points about “working with the other side” as well as an eagerness to introduce bills that will improve the country’s infrastructure and health care system. Whether any of that comes to reality is a matter of conjecture.
Will President Trump exercise his business deal-making skillset to work with the Democrats, or will he dig in his heels further with his political base and try to exert his will over Washington, D.C., over the next two years?
And does any of this affect self-storage? We’ll explore these issues with political and self-storage experts to gain a glimpse of how the D.C. climate may affect the economy going into a new year.
Healthy Economy Failed To Win Votes
Leading up to the midterm elections, economic growth hit the fastest clip in nearly four years. Consumer spending was brisk. Unemployment was at an 18-year low, and average hourly wages started climbing during the summer at a 2.7 percent growth rate compared with the previous year.
Historically, major election outcomes have been driven by pocketbook issues, according to Forbes. Since the end of the last administration, incomes have finally started rising in real terms. Gas prices generally have been low, although they bounced around during the latter half of the year. Millions of new jobs have been created, the unemployment rate fell below four percent, and taxes on the private sector have been cut substantially.
There were more job openings listed by U.S. companies than there were unemployed people, according to Project Syndicate, an international media organization that publishes and syndicates commentary on global topics.
“Such conditions usually foreshadow rising real (inflation-adjusted) wages, which would indicate that American workers, many of whom were left behind in the anemic post-crisis recovery, might finally reap benefits from the strong economy,” Project Syndicate says.
Electoral models predict that a strong economy favors the party in power, yet, with the economy in its best condition in over a decade, voters punished Republicans in House races. Obviously, other factors besides the economy were in play during the mid-terms.
Early election analyses indicated that the economy was further down the list of issues for voters. They appeared more concerned about healthcare and the Trump effect in granting Democrats a majority in the House. Meanwhile, immigration concerns, the contentious Brett Kavanaugh hearings, and—what else?—the Trump effect were credited with helping the GOP increase its margin in the Senate.
Mid-term elections tend to be a referendum on the president and his policies. And it is possible that, despite high ratings for his handling of the economy, many voters may not attribute the economy’s strength to Trump’s policies, according to Project Syndicate.
“If you look at Trump’s popularity ratings, and given how good the economy is, he should be much more popular than he is,” observes Christopher Thornberg, founder of Beacon Economics in Los Angeles, who forecast the subprime mortgage market crash in 2007 as well as the global economic recession that followed. “The man is intensely disliked by a big hunk of America. That kind of intensity absolutely skews things to the Democrats.”
Additionally, the “economic effect” on elections may no longer hold true. “While economic distress may harm the party in power, economic strength might not help it as much as in the past,” Project Syndicate says. “As voters become wealthier, more have the luxury of focusing on other issues.”
What’s To Become Of The Economy?
While the Republicans controlled both Houses and the executive branch, they managed to pass legislation that cut taxes for corporations and many Americans and gave additional benefits to commercial real estate.
However, Washington gridlock and a lack of political will prevented a comprehensive infrastructure plan from coming to fruition. “Everybody loves infrastructure and they failed miserably,” says Thornberg.
Now that the Democrats are in position to thwart any legislative plans of Trump or the Republicans, can anything meaningful get done over the next two years that will benefit businesses such as self-storage, or will political gridlock prevail? Actually, D.C. gridlock sometimes works well for the general economy and financial markets.
The day after the 2018 mid-terms, the Dow Jones Industrial Average rose 545 points, or 2.1 percent. “The new Capitol Hill alignment isn’t viewed as a major game changer for the economy or markets,” according to USA Today, “largely because the split Congress makes it unlikely that legislation would undo parts of President Trump’s agenda, such as large tax cuts and deregulation of business.”
However, a continuation of divisive politics could prove to be an economic drag, particularly if a crisis develops and responsive remedies are required.
“The real problem has been the radicalization of both parties,” says Thornberg. “Split Houses are just going to grind everything to a halt. If you go back 30 years ago, under Reagan and Tip O’Neill, look at the grand compromises those two managed, including that huge tax overhaul. They showed a degree of diplomacy and negotiation that these guys today not only seem to have no ability to accomplish, but they have little interest in trying.”
While split Houses have been able to work together along with the president in the past, the current divisive political climate may produce cooperation on a few bills at best, or political Armageddon at worst.
“Republicans have talked about bringing on another tax cut for the middle class, and I could see Democrats agreeing to that, but only after some major concessions,” says Cody Bond, economic analyst for REIS, a New York-based firm providing data and analytics support to the commercial real estate industry. “The other thing would be infrastructure spending, which both parties would agree on, but then again, Democrats can hold things hostage. I think the more likely scenario—and more dangerous scenario—is that it becomes politics as usual and we have a dispute over raising the debt ceiling. When we need to lift the debt ceiling in the spring, we could see a shutdown.”
Ken Nitzberg, CEO and chairman of Devon Self Storage in Emeryville, Calif., forecasts a similar scenario. A split House “will set heels in deeper because you’re not going to get anything through Congress,” he says. “I don’t think anything is going to get passed except continued budget bills so they can all get paid.”
Perhaps the greatest threat to progress on the Hill would be if Democrats held continuous committee hearings investigating Trump and his people, possibly going all the way to the nuclear option.
“I don’t think the present divided government bodes well for much cooperation,” says Steve Cortes, a CNN political commentator and Trump advisor. “I believe that, despite their protestations otherwise, the Democrats will at least go down the path toward impeachment, and perhaps all the way, forcing a Senate trial.”
As a deal-maker in his real estate businesses, Trump could employ those skills to negotiate bills in Congress to win passage, but should the Democrats start investigating his personal and business dealings, all bets are off.
Democrats have said they plan to begin a series of investigations of the president and his administration, and Trump said in a news conference that any hope for bipartisan deals would evaporate if House Democrats start to investigate him. The investigations, he said, would precipitate “a war-like posture”.
Should a minor miracle occur in Washington and all sides agree on legislation that would benefit Americans’ pocketbooks, the likely areas that could be addressed include infrastructure spending and a middle-class tax cut.
“The bright-side scenario would be the Democrats and Republicans come together on something like infrastructure, which would be a nice boost to the economy, especially since we need infrastructure spending so badly,” Bond says.
But the Republican-controlled government failed to pass infrastructure spending during the past two years. Plus, this New Deal type of legislation to rebuild decaying roads, bridges, water and sewer systems, railways, and subways would be frightfully expensive.
“With control of both Houses, if the Republicans were going to pass infrastructure, they would have done it,” observes Aaron Swerdlin, vice chairman of Newmark Knight Frank in Houston. “If they were really serious on infrastructure, they probably could have done that first. That would have been a stronger way to have additional revenue find its way into the general economy, because they would be investing in companies that were building in the U.S. Those jobs and increased tax revenue from that additional employment could have been of use to finance tax cuts, but it seems they did that backwards.”
Swerdlin believes policies that put more money into the pockets of middle-class consumers would benefit self-storage.
“It’s discretionary spending, especially for the middle class, so the more you can do to strengthen their ability to spend money, that’s good for self-storage,” Swerdlin says. “Policies that would truly benefit would be real tax cuts for the middle class. When you give a stimulus to 30 percent to 80 percent of the population, nearly every dollar you put into that demographic finds its way immediately into the money supply. If I’ve got an extra $120 that I can spend on storage or can afford to buy an RV that I have to store, anything you can do to improve the economic position of the middle class of America, nothing can help self-storage more than that.”
Cortes is skeptical about the prospects of the next Congress enacting tax legislation. “Sadly, I just do not see serious economic reforms from here,” he says. “I hope I am wrong though; and the best chance of a bipartisan growth inducement would be a very targeted middle-class tax cut.”
Tax Breaks For Storage Owners
In addition to reducing taxes for individuals and businesses, the 2017 tax reform legislation allowed storage owners additional benefits. “The single largest benefit to self-storage of tax reform is the bonus depreciation change,” Swerdlin says.
He explains that certain building components that have a useful life of 20 or fewer years can earn bonus depreciation and the new tax law allows owners to deduct 100 percent of those items in the first year.
“Self-storage has a lot of components that have depreciated assets with a useful life of less than 20 years,” Swerdlin says. “If you can deduct 100 percent of those allocations in year one, you can reduce your adjusted basis on a property significantly. While you own it, the returns you realize are off the charts. If your effective basis while you own a property is reduced by 20 percent or 30 percent in year one, or you can use that tax loss to offset other income, it’s a windfall for anyone who owns real estate.”
As an owner of self-storage properties, Nitzberg saw a mixed bag of results from government policies during the previous two years.
“The tax bill certainly helped commercial real estate in terms of the depreciation schedule,” Nitzberg says. “They allow you to take some significant write-offs the first year. Those were helpful to our business from a tax standpoint, but it didn’t give us any more tenants or revenue.”
On the negative side, tax legislation removed certain deductions, especially for homeowners in states with high tax rates. Deductions for state and local taxes are capped at $10,000, which will have a significant impact on residents in states with high property taxes.
Also, the Federal Reserve’s continuous rate hikes have not been welcomed by real estate owners. “Right now, we’re in a rising interest rate environment and that hits financing office and apartments, but less so self-storage,” Bond says. “That makes financing more difficult to obtain for smaller businesses.”
Nitzberg believes rising interest rates hurt self-storage operators as well as other business owners. “T-bills have gone from 50 basis points to 300—that’s not good for our business,” he says. “If you want to get loans, it makes the cost of money more expensive.”
The Trump tariffs imposed on China and other countries have hurt some businesses, including self-storage. Mini-Storage Messenger has reported how tariffs on imported metals have added to the cost of building new facilities and slowed some construction projects.
“We’re supposed to have a pro-business government, and it doesn’t seem to be doing that, at least from my specific needs,” Nitzberg says. “Imposing tariffs has made the cost of building materials go up dramatically.”
Looking for a silver lining in Trump’s trade policies, Swerdlin sees tariffs as a way of putting the brakes on the overheated building activity in the industry.
“It’s fair to say the increased cost of metal has had an impact on development,” Swerdlin says. “With all the concern over new construction and new supply, maybe it’s not a terrible thing to have construction costs rising; maybe that will wind up being a blessing in disguise for the industry, because you might have built 20 percent to 30 percent more facilities than you would have otherwise needed.”
Facing a split government, Trump can still unilaterally enact policies that impact business over the next two years, including the expansion of tariffs.
“Because the president does not need Congress much in trade negotiations, I foresee a tougher stance going forward from President Trump toward China,” Cortes says. “Given the completed deals with North America via the USMCA and the Korean pact, I believe deals are possible and even likely with Japan and Britain. But all that momentum will further harden the Trump stance versus China.”
Heading into January, as the new Congress is seated, all eyes will be on the House of Representatives to assess how Democrats will wield their newly won power. Will it produce gridlock? And what of the economic effects?
“Having multiple branches of government with checks and balances and having some power between the two parties being shared overall is probably going to be a good thing,” Swerdlin says.
The Democrats likely won’t have enough power to undo Trump’s tax reform and economic policies, which Cortes views as a positive. “Tax and regulatory relief have done wonders for our growth, incomes, and optimism, especially for small business,” he says. “That said, I do not see further gains via policy from here due to the standoff that should last for two years in Washington.”
While considerable focus will be on immigration, Congressional hearings, and tariffs, economists will pay attention to other signals to determine the direction of the economy in 2019.
“The real bellwether is to keep an eye on employment numbers,” Bond says. “If we see two months of consecutive job losses, that would be the canary in the coal mine in terms of a faltering economy. As long as we continue to see solid or slightly positive job numbers, we’re clear.”
David Lucas is a freelance writer based in Phoenix, Ariz. He is a regular contributor to all of MiniCo’s publications.