While the full implications of the new tax reforms have yet to be felt, many in the commercial real estate sector believe these reforms will reflect favorably on this industry. The reduced corporate tax rate has already inspired many companies, including Apple, Boeing, and banks like JPMorgan Chase, U.S. Bancorp, Wells Fargo, Bank of New York Mellon Corp. and Fifth Third Bank to up their investment in employees through bonuses, higher minimum wages, increased 401(k) matching and advanced education programs.
A stronger workforce and healthy bank sector help the economy as a whole, but Ernest DesRochers, senior vice president and managing director in NorthMarq’s New York office, believes there is much more to be excited about.
“More than any sector, the commercial real estate sector has not seen potential benefits like these since the early 1980s,” he says. “Shortened depreciation for all property types, from 39 years for commercial, 27.7 years for multifamily and 25 years for all types, is a boon to itself. Add the retention of 1031 tax deferred sale rules, full deduction of mortgage interest, the preservation of carried interest and the taxing of pass-through entities like LLCs at a lower tax rate, and we could see major new development in many property sectors.”
Of course, there is always the possibility that there could be too much of a good thing. Confidence – not to mention developers – can overbuild. Lenders can loosen their purse strings just a bit too far. Investors can rob Peter to pay Paul. While 2008 might be 10 years ago, responsible lenders would like to believe those within the industry still remember it like it was yesterday.
“Massive tax breaks for the commercial real estate industry often cause a boom to bust in the market as lenders chase product to lend on and developers take on more risk to generate yields,” DesRochers cautions. “Will lenders maintain the discipline they have developed since the bust of 2009? Will cap rates move up or down to reflect the new tax benefits?”
These concerns and further questions surrounding the new tax reforms aren’t unique to DesRochers, as Kristen Croxton, senior vice president of Capital One Multifamily Finance in Capital One’s Newport Beach, California office, can tell you.
“Tax reform was a hot topic at the recent National Multifamily Housing Council conference and I think it will continue to be a hot topic until all the pieces are ironed out,” she says. “I’m most interested in better understanding which clients and types of organizations will benefit the most from the tax changes. In addition, it will be important to better understand how these changes could impact client investing decisions in 2018. Will they buy more? Refinance more? These are questions that I’m hoping CREF will shine a light on.”