Washington’s Holiday Gift: Implications for the New Tax Bill on Commercial Real Estate

The recently-passed tax bill has far-reaching implications for every sector, including commercial real estate. While the full implications will not be understood for years due to the complexity of the legislation, much of the bill is sufficiently clear to gauge the impact on the various commercial real estate sectors—from the multifamily market, which should benefit substantially, to the office market, which will likely see more modest impacts.

KEY TAKEAWAYS

  • Tax liabilities for most commercial property owners and investors will decline under the new tax bill as tax rates are lowered for all businesses and most individuals, while most prevailing special tax benefits enjoyed by the real estate sectors have been retained.
  • The tax bill should improve property fundamentals for commercial real estate in the near term due to an improving economy as well as favorable tax treatment for businesses in several key industrial sectors that lease commercial real estate. The retail and industrial sectors should be clear winners here. However, the relatively minor cut for individual taxpayers will limit net additional consumer spending, and thus the potential boon for these sectors.
  • The multifamily sector looks to gain from tax law changes that will reduce the benefits of homeownership in many markets, and thereby raise the incentives for apartment rentals for some households.
  • The office sector looks to benefit the least of the major property sectors. Key office tenants will gain only limited to average tax savings from the new tax code. Moreover, many corporations will distribute much of their tax savings to shareholders instead of investing in new facilities.
  • Impacts on real estate capital markets are less clear. Uncertainty as to the timing and nature of the tax reform likely kept some capital on the sidelines this year, so enactment of the tax act could encourage more transactions now that the uncertainty has been lifted. However, the act does not confer any new significant benefits specifically to real estate owners, blunting any potential capital inflow to the sector.
  • Interest rates may rise faster after the tax cut due to the greater national debt and more aggressive fed rate hikes. Impacts for the property sector could include lower returns on interest-sensitive investments (like REITs), more costly acquisition costs and slower leasing once the interest rates eventually slow economic growth (likely in late 2019 or 2020).