Divided government, economic fundamentals unchanged
The shift to a Democratic Congress will likely make major legislation more difficult over the next two years while Republicans control the White House. Midterms rarely change policy enough to move property markets directly, especially when the result is a divided government. The larger forces are the Fed, inflation and growth.
Debt-limit negotiations represent one potential source of market volatility. The limit is expected to bind next spring, and Treasury could run short of cash to pay all obligations on time about a year from now. In a bond market already seen as fragile, a standoff could put additional upward pressure on interest rates. Shutdowns and deficits on autopilot add to the pressure, mainly through the term premium.
The Iran conflict is the main swing factor for inflation and rates. The war, now in its eighth month, has disrupted energy flows through the Strait of Hormuz and pushed Brent crude back above $100 a barrel. The 10-year averaged 5.13% in October External Link, the highest monthly average since 2002, with nearly all of this year’s rise coming through real yields rather than inflation expectations. Further escalation of the conflict remains an important downside risk for inflation, interest rates and economic growth.
The Fed and the economy, more than Congress, set the level of rates. Fed funds futures put an 83% probability of an additional 25 bps rate hike in December, while 14 out of 18 FOMC members project the federal funds rate to be within the 4.0% to 4.5% range at the end of 2027. Congress can also influence rates through fiscal policy and its impact on the term premium, particularly during a debt-limit standoff. We expect the 10-year to settle in the 4.5% to 5.0% range as the energy shock fades.
Trade policy may shift to executive action. If Congress cannot move legislation, the administration may pursue its agenda through tariffs and other executive actions. The average effective tariff rate has held near 7.0% since the start of 2026, and the baseline keeps it there. Trade policy uncertainty is likely to persist into 2027, particularly surrounding tariffs and USMCA negotiations. We assume the existing USMCA framework will largely remain in place as the countries continue negotiations into next year, providing some near-term stability to trade policy.
Most of these policy changes are unlikely to materially affect property markets directly. Instead, their influence will largely be transmitted through the broader economic environment, particularly interest rates and inflation. Investors will see the effects in cap rates, valuations and debt availability, while occupiers will see them in borrowing and fit-out costs, expansion decisions and supply-chain footprint choices.
What history says: returns and occupancy after midterms
Private commercial real estate has delivered positive returns following 10 of the last 12 midterms, but the election itself explains little about performance. The NCREIF Property Index (NPI) generated an average return of 9.2% in the four quarters beginning with the election quarter, in line with the 8.7% average across all comparable periods since 1978. Returns ranged from -8.0% (2022) to +20.1% (1978), with the two negative cycles, 1990 and 2022, coinciding with the early-1990s credit crunch and the 2022 interest rate shock.
Party control has historically made little difference to private CRE returns, which averaged 8.8% under unified government versus 8.6% under divided government across 47 comparable periods. Interest rates and broader economic conditions have been more consequential. However, the relatively small sample sizes warrant caution in drawing firm conclusions.
REITs, which respond more quickly to changes in market conditions, show a similar pattern but with wider swings. Returns averaged 8.5% in the 12 months beginning at the end of October following midterm elections, compared with 11.7% across other comparable periods, with outcomes ranging from -7.8% (2022) to +34.8% (2002). REIT and NPI returns exhibited almost no correlation over the same periods (0.07), partly reflecting the lag in appraisal-based valuations. The REIT index is up 11.7% year-to-date through October but declined 6.4% between June and September as Treasury yields rose.
Occupancy tells the same story. The percentage of space leased changed by less than half a percentage point, on average, in the year following midterm elections, but has tracked real GDP growth relatively closely. This suggests that the broader economic environment is a more important driver of occupancy than election outcomes.
Takeaway: Midterm timing alone has not been a reliable predictor for private or public CRE returns, or occupancy. Economic growth, interest rates and credit availability have mattered far more.
The outlook for occupiers and investors
Cushman & Wakefield Baseline
Our baseline has real GDP growing a little over 2.0% in both 2026 and 2027, supporting improved occupancy across most property types. After-tax corporate profits are expected to grow at a double-digit pace this year before slowing to mid-single digits in 2027. The labor market should remain soft but positive, with unemployment in the low-to-mid 4.0% range and payrolls adding roughly 50,000 to 65,000 jobs per month. Hiring-led demand may remain modest, but return-to-office trends, strong corporate profitability, business formation and the continued flight to quality and modernization of facilities should provide additional support for leasing activity.
Inflation is expected to moderate gradually but remain elevated, with CPI averaging approximately 3.4% in 2026 before cooling to just under 2.8% in 2027. Our baseline anticipates the Federal Reserve raising the lower bound of its target range to 4.0% in December 2026 and holding rates steady throughout 2027. Longer-term interest rates are also expected to remain elevated, with the 10-year Treasury yield fluctuating between 4.5% and 5.0% through 2027 before gradually settling around 4.5%, consistent with our estimate of its long-run equilibrium level. Risks to the outlook remain tilted to the downside, particularly from persistent inflation and elevated energy prices. Our baseline assumes oil prices gradually retreat from their 2026 highs toward the low-$70s by 2027–28, although renewed geopolitical tensions could prolong elevated energy costs and inflationary pressures.
Fundamentals were already strengthening heading into the midterms. Third-quarter industrial net absorption was the highest since early 2023, multifamily vacancy fell to a three-year low of 8.6%, office absorption has been positive for five consecutive quarters, and retail vacancy of 5.9% remains well below its 7.4% historical average. With new construction slowing sharply across most property types, even modest demand growth should be sufficient to support stable or improving occupancy. These underlying fundamentals, rather than the election outcome, will be the primary drivers of property market performance.
Data centers: AI demand primary driver, but policy matters. Data centers are particularly sensitive to federal policy on AI, energy and trade. Democratic control of Congress could bring greater scrutiny of AI regulation and the environmental impact of data center development, although divided government may limit major policy changes. Power availability, permitting and tariffs remain key considerations for new development. We expect continued growth, supported by strong demand for AI and cloud computing. Ultimately, technology adoption, power availability and infrastructure capacity will have a far greater influence on the sector than the midterm outcome.
For investors, the midterm election results are unlikely to materially influence commercial real estate performance. On the one hand, a divided government introduces some degree of fiscal policy stability which should be calming for markets. Downside risks around shutdowns and the debt limit, however, could threaten to introduce periodic volatility. The more pressing issue is the Iran conflict and its implications for energy prices, inflation and interest rates. Our baseline assumes a gradual de-escalation of the conflict, allowing oil prices to moderate and interest rates to stabilize, providing greater clarity for investors.
Higher interest rates do not necessarily mean weaker transaction activity. Historically, when the 10-year Treasury yield has risen by more than 50 bps year-over-year (YOY), U.S. commercial real estate sales volume has increased by an average of 23%. When yields have fallen, volumes have declined by an average of 2.7%, and when rates have been relatively stable, volume has risen by an average of 33.5%.
The takeaway is that economic growth and interest rate stability matter more than the direction of rates alone. A strong economy can support healthy transaction activity even when interest rates are rising, and greater clarity on the path of rates helps investors make decisions and move forward with transactions.
