Marcus & Millichap Report: Tax Reform’s CRE Impact Likely Limited

While the separate versions of tax reform put forth by the U.S. House of Representatives and the U.S. Senate have not yet been reconciled, the report concludes that neither proposal, or any combination of the two, would cause anything close to shockwaves in the commercial real estate industry.
John Chang -  first vice president, research services with Marcus & Millichap
John Chang – first vice president, research services with Marcus & Millichap

Tax reform legislation that is currently in the hands of the U.S. Congress is not quite in its final form yet; however, as is, the proposed changes are not expected to have any notable negative impact on investment in the commercial real estate industry, according to a new tax plan report by real estate investment services firm Marcus & Millichap. On the other hand, there is likely to be some upside.

“The most significant outcome of finalizing the tax plan would be a reduction of uncertainty,” John Chang, first vice president, research services with Marcus & Millichap, told Commercial Property Executive. “For the last year, commercial real estate investors have not had a firm grasp of what to expect from the tax plan, and as a result, several have held off significant business decisions. With greater clarity on what to expect, investors have some information upon which to base their commercial real estate investment decisions.”

Sometimes, no news is good news. Key findings of the report include the conclusion that there would be no fundamental alteration of investor-friendly 1031 tax-deferred exchanges, business interest deductibility or depreciation rules. Additionally, for real estate businesses, full deduction of interest on real estate would continue.

Swaying demand

While the proposed tax reform would hardly change the face of the commercial real estate industry as we know it, it could influence demand in certain sectors, including multifamily. “Previous tax laws offered an incentive for people to purchase a home–the deduction of mortgage interest and state property taxes from income when calculating taxes. Though these deductions partially remain in place, the higher standard deduction effectively offsets the benefits most first-time homebuyers generally receive, so more renters may opt to stay in apartments longer,” Chang said.

The student housing market could be affected as well if the final legislation includes taxing of reduced tuition earned by graduate students for their on-campus work, according to the report. Such a provision may very well render tuition too expensive for some graduate students, which would lead to lower enrollment and thus, lessen student-housing demand. Healthcare real estate may experience adjustment in demand, too, with the proposed elimination of the Affordable Care Act’s individual mandate. This change would reduce the number of insured individuals, which in turn, would diminish demand for medical services and seniors housing, leading to a modest decline in demand for healthcare real estate.

“By restructuring the tax laws, Congress has the potential to shape behavior. They could increase demand for apartments, encourage people to move to lower tax states, or convince investors to reposition their business enterprises,” added Chang. “These behavioral changes, whether intended or not, could have a significant long-term impact on the commercial real estate space–shifting supply and demand as well as portfolios.”

Ultimately, however, Marcus & Millichap concludes that neither the House of Representative’s version of tax reform nor the Senate’s version–or any combination thereof–would cause a major shakeup in the real estate industry.

Image courtesy of Marcus & Millichap