The beginning of 2025 has quickly moved into and almost out of January. The commercial real estate market, or CRE as it is known, appears to be set for another dynamic year.
January 24, 2024
By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC
First Days of New Administration. The initial days of the new administration have been filled with executive orders, anticipation, and speculation of clarity in policy for the investing world. For a number of years, we have written articles on the advantages of Delaware Statutory Trust (DST) being used in conjunction with 1031 exchange replacement properties. We have also opined on the different strategies for investors using alternative real estate positions to enhance non-correlated returns and potentially defer capital gains taxes. This included investments into opportunity zones which may be under review for potential extension this year.
Real Estate Predictions. There are many predictions for what we can expect for the commercial real estate market this coming year and beyond. There will be evolving market conditions as well as fluctuations in many financial and political arenas that may affect the commercial real estate market. This will require property owners and investors contemplating selling their property to take positive action. This will require advisors, real estate brokers, CPA’s, and other professionals to work as a team to help guide the investor to stay informed about the latest opportunities and trends in 2025.
The past few years CRE as well as 1031 exchange transactions have faced many hurdles to produce the volume of transactions that has happened. These hurdles included rising interest rates, reduced inventory, uncertain political situations, natural disasters, and a host of other localized issues.
Interest Rates Up & Down & Up Over the past 40 years interest rates have risen and fallen. Creativity in the marketplace seems to have adapted to the interest rate changes. Buyers and sellers will come to grips with the reality of the interest rates and each will adapt to affect the sale (disposition) or acquisition of real estate. This may be good news for transaction volume that is expected in the tax deferred IRS code known as section 1031.
Financing (new investments or refinancing current investments) faces challenges especially in light of the strict underwriting guidelines or as some would put it more conservative guidelines. These guidelines are being used when approving loans for new buyers as well as for investors attempting to refinance their current ownership. Sellers who are motivated may decide to seek more creative solutions by offering seller financing. This all hinges on how motivated the sellers are to move from their current investment property either selling outright or utilizing a §1031 exchange. A §1031 exchange may optimize their potential replacement property or repositioned asset.
Inventory Supply. In certain locations the amount of available inventory may have restricted sellers from even listing their properties because of the limited supply that would qualify as a replacement property. Sellers who utilize DSTs typically do not face many inventory limitations. However, sellers looking at a traditional 1031 replacement property may move and adopt the reverse exchange as an option. Reverse exchange enables an investor to acquire a property prior to selling their current investment property. In a competitive market this flexibility may provide for a viable strategy. Other investors may seek to buy properties that are considered value add and that would be perfect for improvement exchange. Both of these strategies may become complicated if properties are not sold when in a reverse exchange is entered into, as well as an improvement exchange where all the improvements cannot be completed by the 180th day of the exchange.
Multi-Family & Industrial in demand. Traditional real estate markets as well as the DST markets expect to see large multifamily properties and industrial spaces still to be sought after. Even with the online shopping known as the Amazon effect, there are necessary retail centers that have become popular and will remain in time demand in traditional acquisitions as well as DST acquisitions. Traditional office space has become challenging for investors to sell. Large office spaces have been packaged in DST that include government buildings such as Social Security Administration, and others, with extremely long leases that may be viable for certain investors. Medical office is still popular among investors, and we have seen increased activity of the limited numbers for medical office offerings in the DST marketplace. Investors moving out of traditional office properties may want to reinvest into more resilient asset classes with the potential for growth.
Short Term Rental Challenges. Many municipalities are currently struggling with property rights with regards to the restrictions on short term rentals. The growth of AirBNB has surely created opportunities, obstacles, an outcry depending on what side of the issue you fall on. Residential investors that face growing restrictions may seek to sell, replace, or in some cases shift their investments to other locations. Certain investors may also seek to change asset classes, so they do not have to deal with the short-term rental situation.
We don’t believe that anyone has a crystal ball as to the velocity of transactions that will happen in 2025. Given the demographics of certain investors and the real estate that they own, many will be seeking to execute a §1031 tax deferred exchange. The demographics also suggest that many investors will seek moving from active involvement or management into passive involvement and seek passive income. There are §1031 strategic insights via DSTs that we may be able to provide to accredited investors.
The higher interest rates we are facing today with limited acceptable replacement properties may be the biggest issue facing investors.
Look for Part Two Soon. We will cover future of §1031, Refinancing and interest rate concerns, shifts in asset classes and geographic shifts, seller financing and a few other topics.
NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.