Archives for 2016

Multifamily and industrial properties will continue to lead growth among commercial real estate sectors as the economy makes moderate gains through the end of the year and into 2017, NAR Chief Economist Lawrence Yun said at the 2016 REALTORS® Conference & Expo in Orlando on Friday.
A crowd gathers to hear NAR Chief Economist Lawrence Yun deliver his outlook for commercial real estate sectors at the REALTORS® Conference & Expo in Orlando, Fla., on Friday.
Speaking at a commercial economic forum, Yun said he expects rental rates in the multifamily sector to rise a modest 3 percent a year through 2018, fueled by young households who see solid job growth but aren’t yet ready to buy. Industrial properties — already one of the strongest sectors — are expected to see solid 4 percent growth in rental rates and little change in vacancies over the next two years.
Retail and office space, which are battling online commerce and telecommuting trends, will see slower growth in rental rates of about 2 percent to 2.5 percent.
Yun said the country is likely to maintain positive economic growth over the next two years, although it is likely to be sluggish: barely more than 2 percent in 2017, and maybe a little higher than that in 2018. Tepid business spending is mainly what’s holding back growth, Yun added, because other types of spending, including consumer and government spending, are still strong.
Inflation will largely stay in check, thanks to low gas prices, but expect it to rise from 1.2 percent this year to 2.5 percent over the next two years because gas prices will continue to drop. That means the inflation rate will no longer offset rising medical costs, rents, and college tuition.
Look for the Federal Reserve to raise its short-term interest rate in December 2016 — and then possibly twice more in 2017.
K.C. Conway, senior vice president of SunTrust Bank, who also spoke at the forum, is more pessimistic about the country’s economic growth prospects. He said growth is already starting to slow and could dip into recession at the end of the year. If so, the United States would join other big economies, such as the European Union, in seeing negative growth. Even China, which says its growth is at 6 percent, could see it slow to as low as 3 percent based on indicators that aren’t included in the country’s official figures, Conway said.
Because of weakness in the U.S. economy, Conway said, the Fed might raise its short-term rate only once (in December) and then not at all in 2017 because increases could hurt the two sectors of the economy that are still doing well: home sales and personal consumption.
Both Yun and Conway said the economy is hurt by the lack of new housing construction, which is keeping prices high and forcing young households to delay home purchases. At the core of the inventory problem are regulations that make it hard for banks to increase their construction lending to builders. Easing those restrictions for community banks, Yun said, would help unleash badly needed financing for builders without putting the banking system at risk, since large, systemically important financial institutions would still be subject to stringent capital rules.
By: Robert Freedman (REALTORMag)
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Sustained by improving job growth and strong demand for multifamily housing, commercial real estate has been steadily recovering in recent years. Looking ahead to 2017, growth is expected to flow into the smaller markets, according to a commercial real estate forecast session today at the 2016 REALTORS® Conference & Expo.
Lawrence Yun, NAR chief economist, and K.C. Conway, senior vice president of credit risk management at SunTrust Bank, expressed confidence that commercial real estate activity should remain on an upward trajectory, but with more uncertainty given the likelihood of a rising interest rate environment in 2017.
Yun explained during his remarks that the commercial real estate sector is on firm ground in spite of the numerous global and domestic headwinds that continue to keep U.S. economic growth in a headlock. He predicts that given the slow growth economic environment, instability overseas and the probability of a rate hike by Federal Reserve at the end of the year, investors are expected to take a cautious approach in the months ahead. He also indicated this would likely lead to a modest decline in commercial property prices, especially in Class A assets in larger markets.
“Prices in smaller markets should continue to climb with strong tenant demand and declining supply supporting growth,” said Yun. “As job creation continues, commercial real estate and vacancy rates will be stable across the country.”
Conway’s remarks centered on the key commercial real estate sectors, investments, and capital market trends. He anticipates that the conditions supporting expansion in commercial real estate will remain strong as long as the Federal Reserve remains dovish on interest rates.
“Housing and consumer spending are the two components buoying the economy,” Conway said. “If the Fed increases short-term interest rates, both of these components will be affected, which could potentially lead to a recession.”
To capture the current state of local economic conditions from Realtors®, NAR Research recently introduced its Business Creation Index (BCI). The new quarterly report offers insight from commercial Realtor® practitioners on whether businesses are opening or closing by industry, population density and sub-region. Indicating slowing business openings, 44 percent of respondents said they had seen an increase in business openings in October, which was down from 49 percent in September.
“While the global economy remains in trouble with high debt ratios, the general state of commercial real estate in the U.S. remains strong due to high multifamily starts and renters occupying quickly,” concluded Conway.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.1 million members involved in all aspects of the residential and commercial real estate industries.
By: Cole Henry (National Association of REALTORS®)
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Thanks to all of the brokers, sponsors and guests who attended the November 2016 CCIM NM Deal Making Session and to those who shared the CCIM NM November Properties.

Over 21 million dollars of commercial real estate properties available for sale were presented from all over New Mexico.
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	Name	Property, City	Type	Price
1.	Randy McMillan, CCIM, SIOR	Las Cruces Storage Facility, 88001	Self Storage	See Agent
2.	Cole Flanagan, CPA & Brett Hills	805-919 N. US Hwy 491, Gallup 87301	Retail	$4,650,000
3.	Anne Apicella	210 Truman St. NE, Alb. 87108	Office	$858,500
4.	Larry Ilfeld, CCIM	25A Schmittle, Lemitar 87823	Ranch	$990,000
5.	Matt Reeves & Michael Reneau	126-138 W. Water, Del Taco @ Prince, Santa Fe 87501	Retail	$4,700,000
6.	Anne Apicella	8701 Comanche Rd. Alb. 87111	Office	$299,000
Closed Deals   ~    Active Investors   ~    Gratitude
7.	Keith Meyer CCIM, SIOR & Clayton King	7521 Cerrillos, Santa Fe 87507	Retail Pad	$2,570,000
8.	Mark Thompson, CCIM	5700 Harper NE, Alb. 87109	Office	$6,500,000
9.	Jacob Slavec & Jake Redfearn	4024 N. Prince, Clovis 88101	Retail	$3,795,000
10.	Anne Apicella	126 Quincy NE, Alb. 87108	Office	$130,000
11.	Keith Meyer, CCIM, SIOR & Jim Wible, CCIM	1200 1st St. NW, Alb. 87102	VL Ind	$445,000
12.	Jim Wible, CCIM & Riley McKee	11920 Candelaria NE, Alb. 87112	Office	$265,000

Like-kind exchanges help keep our economy rolling. That’s why the political change-up coming to Washington could have significant ramifications for real estate, investors, low-income workers, and more.

On November 8, the Republican Party won the presidency and retained majority control over both houses of Congress. This means that federal tax reform in Washington is imminent. Since the news of this electoral sweep broke, I’ve been working — alongside a group of similarly dedicated individuals — around the clock to educate the public on the importance of Internal Revenue Code Section 1031 to the U.S. economy.

What Is It, and How Did We Get Here?

Section 1031 is a common way to defer capital gains taxes by reinvesting sale proceeds on assets held for business and investment purposes. Individuals and businesses alike can exchange their real or personal investment property for like-kind replacement property within 180 days of the first sale, placing their sale proceeds with a qualified intermediary in the interim.
History is helpful to understanding this issue in context. This portion of the tax code dates back to the 1920s and was originally geared towards the agricultural community. Farmers and ranchers would use Section 1031 to combine acreage, acquire higher-grade land, or otherwise improve the quality of their operations. By swapping their land for another property of equal or greater value, they were able to defer capital gains tax payments because they never pocketed any of the sale proceeds and thus didn’t have the cash necessary to pay.
The tax law is now frequently applied to a wide array of industries and allows taxpayers to exchange business-use or investment assets for other, similar assets without recognizing a taxable gain on the sale of the old asset. As a real estate professional, you’re most likely to be acquainted with clients using Section 1031 like-kind exchanges in commercial, agricultural, and rental real estate, but investors can also use it for heavy equipment, artwork and collectables, airplanes, trucks, livestock, and other qualifying assets.
Though tax reform has been on the lips of many a candidate and politician over the years, the last significant change to the country’s tax code was enacted almost exactly 30 years ago, under President Reagan’s Tax Reform Act of 1986. Over the last three decades, various tax reform proposals have threatened Section 1031, the legislature ultimately failed to pass any meaningful changes to the code. Now that one political party controls the White House and both houses of Congress, tax reform is imminent.  There is a real potential for Congress to overturn or significantly revise Section 1031.
Eliminating or overturning Section 1031 would be disastrous. Individuals and businesses are motivated to use like-kind exchanges whenever they are selling a successful asset. And because it motivates investors to sell assets, Section 1031 generates transactional activity, and transactions beget economic growth and stimulus. The cost of overturning or revising the code would be enormously detrimental for both the micro- and macroeconomic landscape of the country. It would dampen the motivation to buy, sell, and reinvest, and might cause significant capital to flee the United States.

What 1031 Does for the Economy

While many Americans may not have directly participated in a 1031 tax-deferred exchange, certainly many Americans have been impacted by the economic activity and job creation created by these transactions. Dr. Milena Petrova and Dr. David Ling, of Syracuse University and the University of Florida respectively, recently published a study analyzing data on more than 1.6 million real estate transactions over 18 years. The study found Section 1031 to be key in stabilizing rents, safeguarding property values, and strengthening the economy. They concluded that 1031 exchanges result in the following:

1. Increased job creation: When real estate is acquired in a 1031 exchange, the property tends to benefit more upgrades, remodeling improvements, and other capital expenditures than real estate acquired without a 1031 exchange. This creates jobs for contractors, appraisers, electricians, plumbers, roofers, landscapers, and others.

2. The generation of substantial tax revenue: Though investors do use 1031 exchanges to defer tax payments, it’s important to realize that 34 percent of the time, some federal tax is paid in the year of the exchange. Moreover, state and local tax revenue increases in the years following transactions as valuations increase and result in higher tax liabilities. Additionally, substantial revenue comes out of transfer taxes, which are paid as a part of every transaction regardless of whether it’s done as a 1031 exchange.

3. Debt reduction: Property acquired in a 1031 exchange that is similar or equal to the price of the relinquished asset carries approximately 10 percent less debt than property acquired outside of a 1031 exchange.

4. Increased real estate sales activity: Like-kind exchanges increase liquidity of the market because they motivate sellers to act. In an analysis of 336,752 properties that were acquired and sold between 1997 and 2014, the researchers found that properties involved in like-kind exchanges had significantly shorter holding periods.

Ernst & Young recently completed a macroeconomic study showing the negative impact of eliminating 1031 exchanges, also at the behest of the Like-Kind Exchange Coalition and other groups.  Ernst & Young found that overturning Section 1031 would result in a hit of between $60 billion and $131 billion to the economy over ten years, in terms of the tax revenue and income that would be lost. Also, they predicted businesses would hold onto capital for significantly longer, resulting in a less efficient market. They also predicted investors and businesses would be less likely to make improvements to their assets, which would mean a huge loss of labor income, much of which would hurt lower-income earners. Lastly, investors might send their capital abroad, driving resources out of the United States, as the loss of the 1031 exchange would make domestic opportunities less appealing.

Real Estate Advocacy on 1031

For these reasons and more, The National Association of REALTORS® has always been vocal in its support for Section 1031. In a member survey on the subject last summer, NAR found REALTORS® to be active participants in like-kind exchanges in many roles: as investors, brokers, and agents; intermediaries; and professional advisers. In fact, the study found 63 percent of REALTORS® participated in a like-kind exchange transaction between 2011 and 2014. Many of those indicated that their transactions would have been smaller in scale or may not have happened at all without the 1031 tool at their disposal. Furthermore, NAR found that nearly all respondents (97 percent) predicted a decrease in real estate values if the provision is repealed.
Section 1031 encourages transactions and effective capital deployment and has a net positive effect on the U.S. economy. Overturning or restricting 1031 exchanges would have many negative ramifications for real estate practitioners, small-business owners, and many middle-class taxpayers. I’m fighting to preserve this vital linchpin of economic exchange in our country. If you want to learn more or join in, visit www.1031taxreform.org.
By: Jessica Healy (REALTORMag)
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