A tight supply and the investor’s appetite for NNN assets lower the cap rates to Historic lows.
If there is an interest rate hike and a tax reform bill is passed for the 1031 like-–kind exchange this could change the scenario real quick.
The commercial real estate brokers are presently thrilled with the present fundamentals. It will remain a good market for the NNN investors. The 10 year treasury is at 2.2 percent. U.S. real estate investing has gone up across the board on all products.
The net lease demand is still greater than the supply Cap rates are historical low. The pricing exceeds prereccession levels. There is a limited supply of quality assets.
The good news, if the NNN market is troubled by anything it’s the lack of supply, as evidenced by low cap rates that are hitting low 4’s and 5s. This favorable supply-side dynamic will not have any relief from the new construction. We have seen an increase in the volume of the new development and the supply is growing but at a modest pace compared to previous growth.
The recovery in development for the net lease and other commercial real estate types has been slowed for obvious reasons. The banks are still significantly slow on funding what they consider risk lending. We are not seeing lending for speculative development in the net-lease sector.
Even though a lot of corporations are putting their capitol to work for them they are still very shy about risking their capital on speculative building. A lot of the retail stores are using their capital to the revamping and renewing of their existing stores.
A for Tax reform affection the 1031 like-kind exchanges it is very difficult to predict what congress will do. It is a possible source for tax revenue. It is absolutely realistic that section 1031 of the internal revenue code could be repealed or restricted as part of the tax reform legislation.
Opponents too such reform name the National Association of REALTORS repeal of the tax deferment would cause a serious impact on commercial real estate and the general economy. It would freeze up capital and discourage investing. The initial hit could be as much as 8 plus billion dollars in lost GDP. The good news the two proposals in the last congress to repeal the like-kind exchanges have since expired.
The general concensus appears to be that the chances of eliminating 1031 exchanges in the near future are extremely small. If the 1031 exchange were be eliminated it would be extremely detrimental to the entire market as a whole. If Congress remains silent on the 1031 the NNN lease will continue to attract investors worldwide. They will pay top dollar for trophy buildings.