REAL ESTATE NEWS

In the current commercial real estate market, multifamily investors are adapting their strategies to navigate uncertain times, with many opting for debt-free transactions and 1031 exchanges to maximize their returns. In fact, Marie C. Flavin, senior vice president and northeast regional manager at the country's largest Qualified Intermediary, IPX1031, reports lately that a "good amount" of players in multifamily space are entering the sales process without any debt on the property.

SHYING AWAY FROM DEBT WHILE MARKET REMAINS IN STALEMATE

"When they're doing the 1031, they don't have any debt relief that they have to replace," according to Flavin, who will be a speaker at GlobeSt.'s multifamily panel this Spring in New York City.

"That deal works for them. They're coming out of an all-cash sale, [and] going into an all-cash acquisition.

That comes as Flavin noted that the CRE environment has been tough to navigate through due to the volatility of mortgage rates, even after brief bullishness following the September rate cuts. While property owners can avoid paying an immediate capital gains tax through a 1031, going from a lower older rate to a higher one today isn't ideal.

"A lot of people are waiting to see what's going to happen," Flavin said.

"Now, obviously the appreciation on their property is always a good thing, but it's not necessarily enough to make people say in another year if the rates have come down, one or 2% then it's going to start looking a lot better to do an exchange."

MORE ACTIVITY IN THE SOUTH AND SUNBELT

That's the generality— but it varies by market. For example, Flavin said most of IPX1031's clients have slowed down on investing in the Northeast and instead have opted more for Southern and Sunbelt regions like Nevada, the Carolinas, and Florida. This trend has remained for the past few years, according to Flavin.

"New York, in particular, is a tough place to be a landlord," she acknowledged.

"A lot of people that had multifamily housing in New York didn't necessarily want to defer the taxes and do the 1031 but they didn't necessarily want to get back into being a landlord in New York. So they may have been taking the money out of state to multifamily and other states that were more landlord-friendly, and more friendly from an income tax perspective."

WORKING WITH BROKERS WILL BE KEY

But even in uncertain and volatile times — that doesn't change IPX1031's approach. It won't wait for rates to fall and plans to keep "marketing aggressively to real estate brokers," — something it has continued to do since the pandemic.

"I think are just a great resource, because they're the first to know that something's for sale," Flavin said of working with brokers.

"So when they're bringing in new clients and getting listings before there's ever a buyer, there can be discussions on [capital gains for the] sale."

Plus, brokers could recommend a 1031 exchange for property managers to use.

TRANSACTIONS UP DESPITE UNCERTAINTIES

While the overall CRE market still faces uncertainties and there's been hesitancy, Flavin did point to a silver lining. From her point of view, transactions have been up over the past two to three months compared with the year through 18 months before.

"I think that's a positive thing. Obviously, the rates did go down a little bit, which was also positive."

Everyone is trying to figure out the new normal. Is that where interest rates are currently, or will they spike more or drop? Regardless, it appears multifamily investors might be finally accepting today's reality if that's the case. In fact, John Chang, national director of research and advisory services at Marcus & Millichap, recently said that various clients have indicated they plan to be more aggressive this year despite the Federal Reserve showing hesitancy to reduce rates further.

Source: GlobeSt/ALM