Equity raised for Delaware Statutory Trusts (DSTs) in the first few months of 2024 has been viewed by many as a very good start to the year. This is especially noteworthy with the bottleneck in many commercial real estate markets.
March 15, 2024
By Al DiNicola, AIF®, CEPA™
DST 1031 Specialist
NAMCOA® — Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC Member of FINRA/SIPC
The bottle neck may be caused by the lingering high interest rates affecting new buyers entering the market. Residential buyers (of multifamily and residential rental properties) are contracting the increase of rents and how those increases may offset the additional loan costs.
2024 Year End Prediction:
It may be too soon to predict the annual equity to be invested but indication are investors are still seeking the advantages of investing in a DST either as a cash investor or via §1031 exchange. 2023 ended with just over $5 Billion in equity invested. There may be an opportunity to reach that level again. There is an estimated $750 Million in equity invested in various DST offerings.
Continued Offerings:
There continues to be new offers being brought to market. Most of the newer offerings we industrial, net leased offerings (aka triple net leases) as well as residential offerings. There also have been land DST (with shorter holding times) being structured to take down land positions for home builders. Multifamily still continues to hold the top spot from an offering and investing positions. There are challengers to the top position as industrial and net lease has gained favor among investors. One other notable increase in interest would be necessary retail offerings.
Tracking Inventory:
The amount of available equity at any given time is around $2.5 Billion, which is slightly lower than a year ago. This time last year the available equity was nearly $3.5 Billion. We track about 75 active DSTs in all the asset classes.
Average offering Size:
The average size of the DST offerings is notable at over $50 Million. The size is notable since this amount os nearly double the size pre pandemic. What this means to investors may be added time to review and select the correct potential alternatives.
Tax Advantaged:
For 1031 investors the tax deferral benefits continue to drive the interest. The annual distribution (Cash flow) has declined over the past two years but has stabilized and shows signs of increasing. Most investors enjoy the tax advantaged income. The higher cost of capital in the leveraged DST has caused cap rates to increase on average. Sponsors are continuing to underwrite with a potentially more conservative method reducing the leverage thus increasing the amount of equity required to fund the entire offerings. On the one hand this conservative underwriting may be good for the overall risk profile investors needing to replace debt (required by 1031 exchange) may be challenged to have a wide variety of offerings.
Cash may be King:
There is also an increase in the number of offerings that are all cash offerings (without leverage). Of the 75 plus offerings we track at any one time nearly 35% are now all cash as compared to under 20% pre pandemic. Most DST with leverage is utilizing loans with a fixed rate that is either interest only (about 60%) or amortized loans. While cash may be considered king investor needing to replace debt in a §1031 exchange may not have the same view as they seek non-recourse debt replacement.
Bottle Neck Release:
The bottleneck in the commercial real estate markets may be blamed on the rise in interest rates. Turning the clock back and looking at historical rates, commercial real estate has adapted to the rise in interest rates either by structuring terms or adjusting asking prices. Currently the DST investor continues to be stable as offerings are closed out and new potential offerings are coming on the market.
More inventory available creates more opportunities for investors. If investors are still seeking all the benefits of a DST investment and the investor can sell their current investment property, then investors are in the driver’s seat. All the same due diligence activities need to take place. Consult your financial advisor who concentrates on the DST investment alternative.
Investor Restriction:
DST’s (Delaware Statutory Trusts) are for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239–691-8098 or email adinicola@namcoa.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, in any form, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin ‑Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
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