The Commercial Real Estate Sector is Optimistic About Growth and Profits for 2019
While the economic indicators are offering mixed signals for the remainder of the year, the commercial real estate (CRE) sector is very upbeat about growth prospects according to the annual Akerman U.S. Real Estate Report for 2019.
The reasons for optimism begin with the Tax Cuts and Jobs Act (TCJA) of 2017, and the rolling back of a huge amount of regulations which many CRE investors and developers felt overwhelmed by.
The TCJA offered significant tax breaks, deductions, and deferral strategies to the CRE industry. One example is the creation of opportunity funds and zones. These zones are in fact neighborhoods or rural areas with high poverty rates. A CRE investor who profits through the sale of an asset such as a stock, real estate, or a business, and invests the profit within 180 days in this new investment vehicle will not be liable for taxes on the profit realized, if they invest those profits in opportunity zones. Secondly, after investing in a zone and realizing profit, the tax on that gain can be deferred, reduced or eliminated entirely. Those who invest in properties or businesses in opportunity zones for 5 years can reduce their tax liability by 10%. Keeping the investment for 7 years reduces the tax liability by 15%. If the investment is held for a minimum of 10 years, there will be no capital gains tax on any appreciation.
The Akerman report states: “There’s tremendous interest on both the developer and investor side of opportunity zones.”
The survey also notes that the enthusiasm of CRE professionals is underpinned by the historically low unemployment numbers (3.6%), and strong GDP numbers. We can also deduce that the widespread belief that the Federal Reserve will lower interest rates in the near term can only serve to buoy optimism further, as this will likely to lead to lower mortgage rates (see accompanying article in this month’s newsletter).
Surprisingly, despite the current trade war, survey respondents predicted that the Chinese will be the most prominent foreign investors the in hospitality, industrial, and office sectors. Increased investment is also expected from Mexico, Brazil, and Argentina. Akerman’s Neisen Kasdin said, “The repositioning of wealth from abroad could signal that while the numbers may vary widely, the trajectory is the same – upward.”
What does this mean for Florida? Plenty. The report indicates that low tax states like Florida and Texas will be the biggest beneficiaries. Changes in corporate real estate taxes, and changes in the permitted deductions of state and local taxes through the TCJA have, “created a challenging dichotomy between high-tax states like NY, NJ, and Illinois, and the low-tax states like Florida and Texas. The cost of living and income tax variables across the U.S. are already contributing to migrations in corporate headquarters … along with the families of those workers. It will be interesting to watch over the next few years … as businesses continue to relocate in consideration of tax disparities between high-tax versus low or no-tax states,” according to the report.
This good news from the CRE sector can only bode well for Florida’s residential real estate market, both in terms of growth and appreciation.