We know the good news. Businesses stand to profit on the new tax bill. A reduced corporate tax rate means more returns for entities from LLC to C-corp. The official bill saved other significant protections for commercial real estate (CRE) like the full mortgage interest deduction and the benefits of 1031 exchanges. Plus, the biannual Allen Matkins / UCLA Anderson California real estate survey predicts the tax bill will boost returns to CRE investors.
Taken in December, the Matkins/UCLA forecast hints at more opportunities in the multifamily, office, and industrial sectors over the next three years. It expects favorable challenges thanks to the key saved tax legislation and reduced tax rates.
Office Space Returns
In the office world, many factors impact the return on the investment. Changes to the way people work are shifting office building design and impacting lease rates. California has reported high leasing rates for office properties, especially in tech markets like Silicon Valley. The survey results show positive tax implications led respondents to have a more favorable outlook on office properties over the next three years even in challenging markets like Orange County. There is potential that tax savings could encourage new office properties construction or for existing businesses to expand their footprints.
Industrial Growth Continues
The industrial sector will continue performing well thanks to consumer spending. Respondents predicted more consumer spending represents more demand for fulfillment centers and warehousing space. The warehousing sector has struggled to meet the demand for existing and new construction. The Matkins/UCLA forecast predicts demand will continue outstripping available supply, even when factoring in new construction coming online in the next three years.
One consideration is that the tax bill could spur a construction boom in commercial real estate. REIS researchers say since the tax bill allows the immediate expensing of multiple types of asset purchases, including real estate, companies might take advantage of this option and build their own warehouses instead of leasing.
The long and short of the tax bill in industrial is this: investment and development interest in industrial properties will remain high. Owners, investors, and industrial REITs expect good returns thanks to increasing lease rates and lower pass-through rate taxes. Industrial real estate is one of the PWC Emerging Trends 2018 top picks for investment and development.
Retail Outlook Less Certain
It remains to be seen if the tax bill will help struggling retail markets. Even if consumers are willing to spend more money thanks to their tax savings, consumers are relying more on online shopping than box stores for their goods. An increased spending potential is unlikely to change consumer behavior. Of the UCLA panel participants, none had started a retail project over the last year, which means retail real estate still lacks a performance confidence that overweighs any favorable tax implications.
What Could Balance ROI
Rising interest rates could temper the positive outcomes in commercial real estate from the reduced corporate tax rate. Higher borrowing costs could stifle any new construction growth across all submarkets, says REIS researchers. Luckily, borrowers have many choices in financing their potential projects beyond what traditional lenders can offer. This will allow new projects to find the best funding terms even if interest rates rise.