Investors Pursuing More Long-Term Real Estate Investment Strategies, Decisions to Buy or Refinance Driven More By Current Low Interest Rates, Outweighing Concerns Over Expected Capital Gains Rate Increase
Walker & Dunlop's Willy Walker was speaking at an industry conference earlier this month when another panelist told the audience if the president is re-elected commercial property owners are going to shed assets wholesale to avoid the increase in the long term capital gains tax rate expected to go into effect at the end of this year.
Walker said when he got on stage he said any one who thinks they can list their property and sell a building before year-end is delusional. The fact is, Walker said, if a property is not already being marketed, it's likely not getting sold this year. There's simply not enough time.
"Besides, if you sold a commercial property, where are you going to replicate the cash flow and inflation hedge you have by owning it today? It makes no sense," he said.
Walker was one of several prominent Washington-area real estate experts to share their opinions on forces driving the current investment sales market with CoStar News Senior Editor Mark Heschmeyer. Their excepted comments appear here. For a national perspective, see the related article: Stand Back: CRE's View of Fiscal Cliff from Two Months Out
Other Washington-area real estate professionals agreed that the pending expiration of the so-called "Bush-era" capital gains tax rates are less of a concern behind investor sales strategy than other factors.
"I believe in a temporary transaction slow down, with minimal tax related activity, as it has become too late for that," agreed Anthony Lanier of Eastbanc. "With the next evidence of a slowdown people will resume chasing yields," he added.
"Capital gains are not the driving force behind those who want to sell, rather it's the historically low interest rates that are creating sales pressure," said Joseph Caputo, president of Washington-based Capitol Commercial Realty, Inc. "Many would like to sell, but they are having difficulty finding adequate replacement property, or an investment that provides a reasonable and safe return. For those who want to take advantage of low interest rates, they had better act fast. My prediction is that rates will remain low for between 12 and 18 months, then they will rise quickly as inflation begins its assault. Rates will not be as low as they are today for at least a decade."
What's more, adds Christian G. Waller, a commercial sales-leasing specialist with Cushman & Wakefield-Thalhimer in Fredericksburg, VA, many owners attempting to sell their property before the increase in capital gains aren't willing to drop their prices enough to incentivize buyers to offset the future tax liability. "I don’t expect a big upsurge in sales due to this issue before year-end," said Waller.
"We’re definitely not seeing a rush to sell in anticipation of potential tax changes," confirms Richard J. McBride, Jr., president of McBride Real Estate Services, Inc. "The most immediate result of a presidential election is NOTHING. Even if the incumbent party is re-elected, it takes at least a few months to reorganize government and figure out the new voters’ mandate. Leasing and sales activity typically slows during that lull. If the capital gains rate is increased, it’s not likely to change the timing of the sales cycle for institutional investors. If anything, it’ll increase the demand for 1031 Exchange transactions, and we certainly expect the number of those transactions to rise."
"Most of our clients have already accounted for the worst case, and pulled back," explains Christopher M. Campagna, president of Braddock Commercial Real Estate Services in Alexandria, VA. "So, when the worst case does not materialize we will have a mini-boom of spending activity resulting in good leasing activity in the second and third quarters next year. But no one should get too heady about prospects for 2013 or 2014," he warns. "Our operational philosophy is for cash/asset preservation to come first, and be very cautious on equity risk with little or no debt accumulation. We are still facing a classic market conundrum - cheap debt, reasonable prices, but too much risk and no good matrix to price it."
"Fear and uncertainty are the biggest factors right now affecting both DC regional employment growth and the office leasing markets," concludes Jeffrey Kottmeier, vice pressdident and director of research for Cassidy Turley. "District leasing activity is down 20% compared to historical norms. Additionally, tenants are extending leases with very short terms, just 12 to 24 months, to ride out the storm. With each measure the Federal Government provides in resolving the budget annd debt issues, the more clarity will return to the leasing and capital markets. If everything goes according to plan, 2014 is the key year for marked improvement in the office markets."