Hornstein Fetter 2018 Multifamily Forecast
Tax Reform Forecast
by Joe Hornstein
There are a number of major changes in the recently-passed tax bill that could affect the multifamily market in the coming years. For one, investors will see generous tax cuts for pass-through entities such as limited liability companies. This makes investment in all real estate asset classes more attractive than ever before, as it will broaden the tax benefits associated with real estate ownership. Another positive change for apartment investors and landlords can be found in the changes to individual tax laws. Specifically, because it disincentives home ownership from a tax perspective, increases to the standard deduction may result in fewer first-time home buyers, more renters, and increased upward pressure on rents.
However, not all changes to the tax law will be positive for multi-family. For instance, in order to qualify for the lower capital gain tax rate on carried interest, investors will now have to hold assets for three years instead of the former one year holding period. Experts are currently split on whether this will constrain inventory for prospective buyers, or if the effects of the longer hold period will be offset by the lower cap gains tax rate. An article I found informative and you may enjoy is http://www.nreionline.com/finalists/how-cre-investors-could-cash-tax-bill
by Scott Fetter
While Buyers may still pay attention to a property’s ProForma potential, lenders seem less and less interested in it. The competitive opportunities in 2018 for us will be properties that show at least a few months of stable income that can justify maximum leverage and qualify for at least $1mm in debt service. A loan that falls under the $1mm threshold AND has an attractive rate is becoming the unicorn of multifamily lending.
Development & Inventory
by Eric Veith
Multifamily developments are continuing at a record pace, but population growth has begun to slow. Unlike this time last year, we can now confidently say that the new units brought to market during the last five years are having an effect on rents. Most of the increased vacancy, concessions, and downward rent pressure is being felt among Class A product, but managers and owners of Class B & C properties have also begun to note a cool down on their end. I think 2018 will be a stable but relatively low-growth year – my recommended strategy is to shift riskier investments (esp. poorly-located Class C properties), which have experienced record gains, into more stable assets (well-located Class B & C properties) that will be better-insulated from a potential economic downturn in the coming years.