Passing the Torch – The Coming ‘Golden Age’ for RE Transactions

By Jay Maddox, Principal, Avison Young: Over the next several decades, an unprecedented transfer of wealth will occur, resulting in billions of dollars of CRE transactions.
James Maddox

Current market participants moan about the dearth of quality real estate investment opportunities against a huge volume of investor demand.  However, long term forces are at play that will potentially bring supply and demand back into balance for years to come. Over the next several decades, an unprecedented transfer of wealth will occur, resulting in billions of dollars of commercial real estate transactions.

The “Greatest Generation” (born in the 1920s and 1930s) is already in the process of handing over $12 trillion of wealth to heirs.  But the real “mother lode” will be the Baby Boomers – those born between 1946 and 1964 – which is expected to transfer some $30 trillion in assets over the next 30 to 40 years.

U.S. Investable Assets Transferred by Year

 Assets chart

Source: Accenture & Bank of America

To be sure, much of this wealth is invested in stocks, bonds and primary residences.  However, a recent Federal Reserve study of household assets indicated that 7.2 percent of households own equity in nonresidential property, 13.2 percent of households own residential property other than their primary residence, and 11.7 percent hold equity in a business, many of which own real estate.  Further, the majority of household wealth is held by individuals aged 55 or over, with the highest concentration in the 65 to 74 age bracket.

Many heirs will not want to take over the responsibility of managing these assets, and/or they will be looking to cash out in order to meet their own financial needs.  Unlike stocks, bonds and money market funds which can easily be divided up, it is harder to divide up and distribute real estate among heirs who want to opt-in and those who want to opt-out.  Selling after the demise of the owner becomes more attractive because the tax basis is automatically stepped-up to current market upon the date of death; therefore, the capital gains tax issue is mitigated.  However, under current tax laws (and absent careful planning) ultra-high net worth estates may also be subject to substantial inheritance taxes, triggering sales of properties in order to meet the tax liability.

These factors will pave the way for a large number of opportunities for sales of the properties which have been tied up in family estates – in some cases – for decades.  Alternatively, the heirs may obtain liquidity via cash-out debt financings or other means.  In any case, a golden age of transaction opportunities should be expected for decades to come.