That the new tax law has increased optimism both about the overall economy and the CRE sector is the overarching theme of the 1st Half 2018 Commercial Real Estate Investment Outlook from Marcus & Millichap. The just-released report highlights how this upbeat investor sentiment bears on CRE in general and on specific product types.
Though many details of the Tax Cuts & Jobs Act have yet to be worked out, “investors have a basic framework of the new rules, which is giving them more confidence in the economy and the performance of commercial real estate,” said John Chang, national director of Research Services at Marcus & Millichap.
Part of this “alleviation of uncertainty,” as Chang termed it, comes from what didn’t happen with the new tax law. For example, some observers had worried, unnecessarily as it turned out, about the possible elimination of 1031 tax-deferred exchanges.
One major tax change that will affect real estate investors is the introduction of a 20 percent deduction on pass-through income. Though the IRS has yet to clarify exactly how this deduction will be applied, investors who hold their real estate investments in a pass-through entity, such as an LLC, could see a sizable benefit.
“This new provision creates an additional lift for commercial real estate investors. It should increase their after-tax yield from these investments, which is very positive,” said William Hughes, senior vice president of Marcus & Millichap Capital Corp.
Fifty-eight percent of the survey respondents expect the new tax law to raise the flow of investment capital into real estate, and 53 percent believe it will result in higher property values.