Since the real estate crash in 2007, we’ve seen a steady rebound in the price of commercial real estate. Domestic All-Property Price Indexes show current commercial property price levels have far surpassed pre-2007 levels*. The reason for that growth in property value is nuanced and varied, but some generalizations can be made.
- In the hospitality sectors, severe underproduction in the 2010’s and a subsequent lag in new supply has contributed to a supply/demand imbalance as demand trends back toward pre-recession levels.
- The story in the multifamily/residential sector is similar – record underproduction in the 2010’s coupled with added demand pressure from Baby Boomers downsizing in retirement and millennials eschewing home ownership.
- In the office sector, a strong economy and historically low unemployment contribute to record lows in vacancy rates.
- As of December 2018, 40% of the country showed record lows in industrial vacancy rates**. Strong wage growth continues to drive consumer spending. Increasing urbanization as well as 2-day and same-day delivery expectations also create increased competition for infill industrial space.
- Increased cost of construction in all sectors creates a barrier to entry for new supply, driving up prices on existing properties
The current bull market and historically low interest rate environment only adds to upward pricing pressure and cap rate compression. We believe these factors combine to make real estate investment an attractive replacement for fixed-income securities. As a result, there has been and continues to be an influx of investment in the real estate markets.
The Double-Edged Sword
In our opinion, all these factors create a favorable market for property owners looking to take advantage of high prices and cash out but can make things difficult for buyers trying to find value. For those property owners who want to cash in on the current market highs and perform a 1031 exchange, this state of affairs becomes a double-edged sword. They’ve received a lucrative offer on their property but everything else in their local market is similarly overpriced, making it difficult to find a suitable replacement property for their exchange.
Expanding the search for a replacement property outside of an investor’s local market or into a different asset class may be the solution to this dilemma. If suitable, there is an investment vehicle that accommodates this desire and potentially provides several other compelling benefits as well.
For accredited investors, the DST (Delaware Statutory Trust) is a passive real estate investment that is viable in the 1031 exchange. It permits investment property owners to sell an asset using a 1031 exchange and reinvest into a diversified portfolio of institutional quality properties across the country, freeing them from the confines of their local markets. It allows investors to leverage the experience and relationships of national, billion-dollar real estate companies in markets and sectors in which the investors themselves might not be experts, but where the potential for property appreciation and higher cap rates may be greater.
Because the DST can include multiple properties, owners may be afforded a greater degree of investment diversification. The DST also eliminates the daily headaches and Terrible T’s of property management for investors and owners.
If you have any questions on this, please feel free to contact our team.
* As of December 2019 – https://www.greenstreetadvisors.com/insights/CPPI
** CUSHMAN & WAKEFIELD RESEARCH U.S. Macro Forecast March 2019 (US_Macro_Forecast_March_2019.pdf)
This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.