Apartment investors may be moving on to greener pastures, if the investment activity last year is any indication. Maryland topped California as the state with the most apartment investment activity, moving the Golden State into the number two position, according to research from Yardi's Commercial Café. While transaction volume was slower in 2017, it was a surprising move considering the demand that California has seen from apartment investors as well as the supply shortage of apartment product in California.
“California has significant legislation enacted in 2017, via SB35, signed by Governor Jerry Brown that requires most local governments to issue housing developers streamlined approvals in 90-180 days for projects that comply with a number of qualifying criteria,” Doug Ressler, a senior researcher at Yardi's Commercial Café, tells GlobeSt.com about what is driving the decrease in investment activity here. SB 35 will allow owners to divest their portfolios of older properties and will be advantageous in producing multifamily housing in higher-cost areas with higher-wage workers in California's coastal regions such as the Bay Area, Los Angeles/Orange County and San Diego.”
Blackstone remained the most active investor in California. During 2017, it closed 7 deals, buying over $2 billion worth of multifamily assets, largely through its subsidiary, LivCor. Essex Property Trust, Berkshire Property Advisors and The Carlyle Group also topped the list for most activity throughout the year. The Bay area was the most active market in California, followed—surprisingly—by the Inland Empire with Los Angeles coming in third for the state.
Ressler says that new tax laws have a lot to do with the drop in activity, and he expects them to impact the market through 2018 as well. “The new Federal tax changes and their impact on REITs, LLC's and CRE Investors, which maintains limits on capital gains and allows current owners to divest their portfolios of older properties and readjust portfolios with new assets,” explains Ressler. “Tax law allows for a reduction in taxes resulting from the gradual obsolescence of various investment assets. The deduction, referred to as depreciation expense, can be applied to buildings, improvements, and personal property but not land. Real property depreciation is calculated instead using a straight-line accounting basis. The tax law, before and after the Tax Cut and Jobs Act 2017, allows for multifamily property to be depreciated over 27.5 years. Therefore, a property acquired for $30 million with land value of $2.5 million can provide a depreciation expense of $1 million per year.”
Specifically, the tax laws have an impact on an investors financial gains, and it may drive more out of the state. “Several primary tax laws have a direct impact on investors' economic interests: capital gains, the 1031 exchange, the step-up in basis rule, depreciation, operating-expense deductions, pass-through entities, and carried interest,” says Ressler. “The loss of any one of these would have influenced the decision to complete a transaction.”
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Kelsi Maree Borland
