1031 Exchange Market on Pace to Raise $1.4 Billion in 2016
The 1031 Exchange market continues its upward trajectory after raising nearly $706 million in equity in the first half of 2016 – more than double the $349.9 million equity raise for the same period last year, according to Mountain Dell Consulting, a market research and analytics firm focused on the securitized 1031 exchange marketplace. In its most recent Exchange Quarterly newsletter, the firm noted that if the current equity raise trend continues, sales totals could exceed $1.4 billion by year end.
Section 1031 of the Internal Revenue Code, which was adopted in the 1920s, allows investors to defer paying capital gains taxes on investment property sales by reinvesting the proceeds into a similar investment property within a specified time frame.
A decade ago, securitized tenant-in-common offerings were the 1031 program of choice, but today only a small number of sponsors still offer them. Delaware statutory trust offerings have stepped in and taken their place, allowing sponsors to have more flexibility with decision making than their TIC counterparts and allowing many more investors to participate in a single offering. However, the majority of 1031 exchange investments are single non-securitized investments.
The current equity raise rate averaged $115 million per month in 2016 and was markedly consistent, unlike 2015, when sales puttered along during the first six months of the year and then ballooned during the final half. The 2016 numbers are even more striking compared to the first six months of 2013 and 2014, when the industry raised just $155 million and $272.3 million, respectively.
So far in this year, multifamily properties have dominated the 1031 exchange landscape, with sales topping $380.1 million or 54.8 percent of the total equity raise. Retail took in $170.7 million in sales or 24.2 percent of the total, while office properties raised $83.1 million, or 11.8 percent.
This is a complete reverse of the most popular asset classes in 2007 when total sales reached $2.8 billion. At that time, office properties were at the top with a $1.1 billion equity raise, followed by retail with nearly $529.8 million, while multifamily followed closely with $529.2 million.
There are currently 19 sponsors raising equity in the 1031 space and more are considering joining in, but it is not all rosy. Average first year returns of 5.3 percent continue to decrease, and loans are increasingly more expensive and difficult to secure, with lenders requiring more money upfront.
506(c) offerings, which allow private placement sponsors to solicit directly to accredited investors, have yet to gain traction in the marketplace, although the broker-dealer community is not as wary of the programs as they once were.
