NEW YORK CITY—“To call the changes 'sweeping' is an understatement, and yet it is still too early to say what the impact will be,” write Victor Calanog and Barbara Byrne Denham at Reis. Nonetheless, with passage of the Tax Cut and Jobs Act by both houses of Congress now a done deal—aside from a few minor points that the House will need to revisit—Reis' chief economist and senior economist, respectively, have charted some of the likely effects on commercial real estate in the near term.
The impact on homeownership by the bill's capping of deductions allowable from state and local income taxes and property taxes has been widely commented on over the past several weeks. However, while Calanog and Denham note that “this will hurt property values directly and will impact most single-family, co-op and condominium transaction values in all locales,” they add that the impact needs to be weighed against what homeowners get out of paying property taxes. They cite the affluent New Jersey suburb of Millburn, which features “some of the state's best primary and secondary schools,” as a locality that may be affected less than “other townships that have comparatively high property taxes, but without similar benefits.”
Calanog and Denham also predict less homeowner flight across state lines than within states. “High-tax urban locations that do not have the amenities to justify the high cost of living—made even higher by the inability of residents to deduct city taxes—will lose more people to the suburbs,” they write in a newly issued white paper. That potentially has favorable, although not uniformly positive, implications for commercial and multifamily owners in some suburban markets.
And while the elimination of SALT deductions has been seen as a boon for multifamily landlords, Calanog and Denham don't necessarily see it as a rising tide that lifts all boats. Population movement may cause a decline in demand for rented as well as owned homes in specific markets, they write, and apartment markets with a near-term influx of new supply will be most at risk.
Across the board, though, “commercial property owners are easily the biggest beneficiaries of this tax bill,” write Calanog and Denham. GlobeSt.com has reported on the bill's preservation of 1031 exchanges and the commercial mortgage interest deduction; less apparent is the potential impact on development. Calanog and Denham say that asset depreciation schedules may spur new construction in the near term.
“There is the possibility that cash-rich corporations may choose to overinvest in real assets and development in the next five years, stimulating supply growth in moribund sectors like office and retail,” they write. “This will raise construction costs that will force businesses to reassess the economic prospects of their specific industries.”
As the threat of e-commerce continues to be a drag on demand for brick-and-mortar retail space, “it seems unlikely that there will then be a rush to build or buy new malls just because businesses can now deduct asset investments in the first year,” write Calanog and Denham. “E-commerce companies, however, that were contemplating the decision to build their own warehouse/ distribution facilities, may accelerate their plans.”
On a fiscal level, the tax plan will add $1 trillion to the US debt, which Calanog and Denham call “a staggering amount” that will have “a significant impact on long-term interest rates as the government will need to issue Treasury securities to finance the debt. If interest rates rise as a result, higher borrowing costs will hurt the housing market even more, as well as the overall economy, potentially slowing growth.”
Summing up, Calanog and Denham write that “The impact of the tax changes on these policy issues can and will be debated for weeks. We hope to revisit this study periodically over the next year or so.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
