CRE Market Update 2025 and 1031 Exchange Trends ~ Part 1

The begin­ning of 2025 has quick­ly moved into and almost out of Jan­u­ary.  The com­mer­cial real estate mar­ket, or CRE as it is known, appears to be set for anoth­er dynam­ic year.

By Al DiNi­co­la, AIF®
Jan­u­ary 24, 2024
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

First Days of New Admin­is­tra­tion. The ini­tial days of the new admin­is­tra­tion have been filled with exec­u­tive orders, antic­i­pa­tion, and spec­u­la­tion of clar­i­ty in pol­i­cy for the invest­ing world. For a num­ber of years, we have writ­ten arti­cles on the advan­tages of Delaware Statu­to­ry Trust (DST) being used in con­junc­tion with 1031 exchange replace­ment prop­er­ties. We have also opined on the dif­fer­ent strate­gies for investors using alter­na­tive real estate posi­tions to enhance non-cor­re­lat­ed returns and poten­tial­ly defer cap­i­tal gains tax­es. This includ­ed invest­ments into oppor­tu­ni­ty zones which may be under review for poten­tial exten­sion this year.

Real Estate Pre­dic­tions. There are many pre­dic­tions for what we can expect for the com­mer­cial real estate mar­ket this com­ing year and beyond. There will be evolv­ing mar­ket con­di­tions as well as fluc­tu­a­tions in many finan­cial and polit­i­cal are­nas that may affect the com­mer­cial real estate mar­ket. This will require prop­er­ty own­ers and investors con­tem­plat­ing sell­ing their prop­er­ty to take pos­i­tive action. This will require advi­sors, real estate bro­kers, CPA’s, and oth­er pro­fes­sion­als to work as a team to help guide the investor to stay informed about the lat­est oppor­tu­ni­ties and trends in 2025.

The past few years CRE as well as 1031 exchange trans­ac­tions have faced many hur­dles to pro­duce the vol­ume of trans­ac­tions that has hap­pened. These hur­dles includ­ed ris­ing inter­est rates, reduced inven­to­ry, uncer­tain polit­i­cal sit­u­a­tions, nat­ur­al dis­as­ters, and a host of oth­er local­ized issues.

Inter­est Rates Up & Down & Up. Over the past 40 years inter­est rates have risen and fall­en. Cre­ativ­i­ty in the mar­ket­place seems to have adapt­ed to the inter­est rate changes. Buy­ers and sell­ers will come to grips with the real­i­ty of the inter­est rates and each will adapt to affect the sale (dis­po­si­tion) or acqui­si­tion of real estate. This may be good news for trans­ac­tion vol­ume that is expect­ed in the tax deferred IRS code known as sec­tion 1031.

Financ­ing (new invest­ments or refi­nanc­ing cur­rent invest­ments) faces chal­lenges espe­cial­ly in light of the strict under­writ­ing guide­lines or as some would put it more con­ser­v­a­tive guide­lines. These guide­lines are being used when approv­ing loans for new buy­ers as well as for investors attempt­ing to refi­nance their cur­rent own­er­ship. Sell­ers who are moti­vat­ed may decide to seek more cre­ative solu­tions by offer­ing sell­er financ­ing. This all hinges on how moti­vat­ed the sell­ers are to move from their cur­rent invest­ment prop­er­ty either sell­ing out­right or uti­liz­ing a §1031 exchange.  A §1031 exchange may opti­mize their poten­tial replace­ment prop­er­ty or repo­si­tioned asset.

Inven­to­ry Sup­ply. In cer­tain loca­tions the amount of avail­able inven­to­ry may have restrict­ed sell­ers from even list­ing their prop­er­ties because of the lim­it­ed sup­ply that would qual­i­fy as a replace­ment prop­er­ty. Sell­ers who uti­lize DSTs typ­i­cal­ly do not face many inven­to­ry lim­i­ta­tions. How­ev­er, sell­ers look­ing at a tra­di­tion­al 1031 replace­ment prop­er­ty may move and adopt the reverse exchange as an option. Reverse exchange enables an investor to acquire a prop­er­ty pri­or to sell­ing their cur­rent invest­ment prop­er­ty. In a com­pet­i­tive mar­ket this flex­i­bil­i­ty may pro­vide for a viable strat­e­gy. Oth­er investors may seek to buy prop­er­ties that are con­sid­ered val­ue add and that would be per­fect for improve­ment exchange. Both of these strate­gies may become com­pli­cat­ed if prop­er­ties are not sold when in a reverse exchange is entered into, as well as an improve­ment exchange where all the improve­ments can­not be com­plet­ed by the 180th day of the exchange.

Mul­ti-Fam­i­ly & Indus­tri­al in demand. Tra­di­tion­al real estate mar­kets as well as the DST mar­kets expect to see large mul­ti­fam­i­ly prop­er­ties and indus­tri­al spaces still to be sought after. Even with the online shop­ping known as the Ama­zon effect, there are nec­es­sary retail cen­ters that have become pop­u­lar and will remain in time demand in tra­di­tion­al acqui­si­tions as well as DST acqui­si­tions. Tra­di­tion­al office space has become chal­leng­ing for investors to sell. Large office spaces have been pack­aged in DST that include gov­ern­ment build­ings such as Social Secu­ri­ty Admin­is­tra­tion, and oth­ers, with extreme­ly long leas­es that may be viable for cer­tain investors. Med­ical office is still pop­u­lar among investors, and we have seen increased activ­i­ty of the lim­it­ed num­bers for med­ical office offer­ings in the DST mar­ket­place. Investors mov­ing out of tra­di­tion­al office prop­er­ties may want to rein­vest into more resilient asset class­es with the poten­tial for growth.

Short Term Rental Chal­lenges. Many munic­i­pal­i­ties are cur­rent­ly strug­gling with prop­er­ty rights with regards to the restric­tions on short term rentals. The growth of AirBNB has sure­ly cre­at­ed oppor­tu­ni­ties, obsta­cles, an out­cry depend­ing on what side of the issue you fall on. Res­i­den­tial investors that face grow­ing restric­tions may seek to sell, replace, or in some cas­es shift their invest­ments to oth­er loca­tions. Cer­tain investors may also seek to change asset class­es, so they do not have to deal with the short-term rental sit­u­a­tion.

We don’t believe that any­one has a crys­tal ball as to the veloc­i­ty of trans­ac­tions that will hap­pen in 2025. Giv­en the demo­graph­ics of cer­tain investors and the real estate that they own, many will be seek­ing to exe­cute a §1031 tax deferred exchange. The demo­graph­ics also sug­gest that many investors will seek mov­ing from active involve­ment or man­age­ment into pas­sive involve­ment and seek pas­sive income. There are §1031 strate­gic insights via DSTs that we may be able to pro­vide to accred­it­ed investors.

The high­er inter­est rates we are fac­ing today with lim­it­ed accept­able replace­ment prop­er­ties may be the biggest issue fac­ing investors.

Look for Part Two Soon. We will cov­er future of §1031, Refi­nanc­ing and inter­est rate con­cerns, shifts in asset class­es and geo­graph­ic shifts, sell­er financ­ing and a few oth­er top­ics.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. 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, whether pub­lic or pri­vate, 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.

Thank you.