Market Trends: Property Exchanges Continue to be Popular
A 1031 exchange, or like-kind exchange, has many benefits for the real estate investor. A 1031 exchange allows an investor to defer capital gains taxes on the sale of an investment as long as the sale proceeds are reinvested into a like-kind property within 180 days. By deferring taxes it allows the investor to have more cash flow available for the next investment. The increased purchasing power gives you the extra leverage to acquire properties with increased investment benefits. It is also an excellent wealth and asset building tool.
A recent survey conducted by the National Association of Realtors found that of their commercial members, eighty-six percent said that like-kind exchange participants invested additional capital in improving the acquired property, and seventy-six percent said they had participated in between one and six exchanges in the past four years. Commercial realtors indicated that their average annual transaction volume was $7.7 million, and of that approximately forty-one percent of the volume was associated with a 1031 exchange[i].
At ArchCrest Commercial Partners, we specialize in helping clients work through all aspects of the 1031 exchange process. Over the past 24 months we have seen a large amount of inbound 1031 exchange buyers, many coming over the hill from California. Many of the primary investment locations (ie port cities like the Bay Area, Los Angeles, Seattle etc.) have seen a huge infusion in foreign capital as well as large institutional investment companies locking up A quality assets at low CAP rates. Therefore, the smaller investors, especially those that have sold their assets in these markets for top of market prices, don’t want to reinvest in the same markets that the big institutional investors are investing. This leads these smaller investors to look at secondary markets, like Reno, to exchange.
This demand for leased investments has driven capitalization rates down 2-3% across the board in Northern Nevada. As recently as 2 years ago, it was possible to purchase properties with a 10% CAP rate and any CAP rate below 8 was seen by the market as aggressive and must have a sound tenant with a long term lease. Now we are seeing CAP rates in the low 6% range for STNL assets (Single Tenant Net Leased) and will see some in high the 5% range for fortune 500 companies.
We are not sure how long this trend will continue, but in the meantime we are excited to continue to help buyers buy and sell their properties and help them through the maze of the 1031 exchange.
If you have been considering a 1031 exchange for your next investment and have questions about the process, please do not hesitate to reach out to the agents at ArchCrest Commercial Partners. With our in depth experience with this process, we will be able to help you decide if an exchange is the right move to help you reach your investment goals.
[i] “Property Exchanges Remain Popular.” Commercial Investment. October 2015: 6. Print.