CALABASAS, CA—The big question mark hanging over the net lease retail sector is the fate of the 1031 exchange, which could be swept away amid changes to the tax code, says Marcus & Millichap. At the moment, the uncertainty's effect on transaction volume or pricing has been “muted,” although that could change.

“Driven by investors' desire to shift their portfolios towards less management intensive assets, 1031-exchange volumes make up a considerable portion of the net lease marketplace,” according to Marcus & Millichap's fall report on net lease retail. Year to date, exchange-related buyers have accounted for more than 40% of transaction volumes. “As a result, the status of this tax provision moving forward will remain a major driver of deal flow and investment demand.”

Given the extensive use of the 1031 provision in net-leased deals, “the potential elimination of this statute could have a substantial impact on deal flow as investors adjust to the new tax code,” the report states. Although the speculation over the exchange's future has been “a constant source of discussion among investors,” thus far it's had little effect on asset pricing, “with infill assets with top-tier tenants pricing from the low-4% band.”