Like-kind or 1031 exchanges are a popular vehicle for freeing up capital for property improvements, according to a recent National Association of Realtors survey. Of NAR’s commercial members, 86 percent said that like-kind exchange participants invested additional capital in improving the acquired property. Seventy-six percent said they had participated in at least one to six like-kind exchanges in the past four years, most often as a real estate broker or agent. The property types exchanged most often were residential, land, and apartments, and properties were held an average of five to nine years. Commercial Realtors indicated that their average annual transaction volume was $7.7 million, with about 41 percent of that volume tied to 1031 exchanges. Under Section 1031 of the Internal Revenue Code, like-kind exchanges allow investors to defer taxable gain on investment property as long as the sale proceeds are invested in another property within 180 days and all other IRC requirements are met. To stay up-to-date on 1031 exchanges, take CCIM Ward Center’s new two-hour online “1031 Tax-Deferred Exchange” course on Sept. 22. Register at ccim.com/education/course/TDEX.
“For the 12 months ended as of 2Q 2015, net absorption across the three major commercial property types — office, retail, and industrial — totaled 575.5 million sf, a 39.3% increase over the 12-month period ended as of the 2Q 2014, and the highest annual total on record since 2008.” — CoStar, July 2015
Hospitality — The lodging sector is nearing the top of this cycle, as demand continues to offset room supply, according to Marcus & Millichap. It forecasts a 65.2 percent occupancy rate in 2015, surpassing the industry’s 20-year high. Strong revenue growth is fueling more projects; increased development may slow the ride after 2016.
Industrial — A market upturn is hitting every U.S. region, with 83 percent of the nation seeing positive industrial net absorption in 2Q15, according to DTZ. In all top markets, 2Q15 rental growth for buildings 10,000 to 50,000 sf exceeded that of larger buildings, another sign of widespread recovery.
Multifamily — Annual apartment rent growth figures are topping those of the 1999–2000 period, according to MPF. Mid-2015 new resident rents increased 5.2 percent YOY, as 2Q15 occupancy rates reached 94.9 percent, up from last year’s 94.6 percent. Rent growth should slow a bit in the next year to 4.5 percent as new product supply kicks in.
Office — Global uncertainty is driving record foreign investment into the U.S. office market, according to DTZ. As of early July, offshore investment in U.S. commercial real estate is up 63 percent YOY. Average CBD office pricing is up 20.3 percent YOY and suburban pricing is up 32.5 percent. Cap rates have compressed 5.7 percent from 6.0 percent for CBD assets and 6.9 percent from 7.3 percent for suburban properties.
Retail — Retail banks have fewer locations than five years ago, according to a CoStar report. Banks have trimmed their footprint by 4.6 percent, closing more than 13,000 branches while opening just over 8,000 new ones. About 95,000 locations remain open, although another 4 to 5 percent of branches may close by year-end. None of this is good news for the net lease market, where retail banks command some of the lowest cap rates.
Article appears in Sept/Oct issue of CIRE Magazine