Securitized 1031 exchange offerings raised just shy of $3.2 billion in 2020, down from last year’s total of nearly $3.5 billion, according to the year-end market report released by Mountain Dell Consulting, a market research and analytics firm focused on the securitized 1031 exchange marketplace.
Mountain Dell noted that while the 2020 equity raise topped $3.2 billion, there was an additional $250 million that was not reported, but flattened the year-over-year total when such outside capital raising activities are considered.
The year was off to a roaring start with more than $1 billion raised during the first quarter. In the second quarter, during the early months of the coronavirus pandemic, the fundraising took a significant dip to $422 million. The third and fourth quarters ramped back up to $739 million and $990 million raised, respectively.
Mountain Dell indicated that if current trends continue, 1031 exchanges could reach a record-breaking $4 billion by year-end 2021.
Section 1031 of the Internal Revenue Code 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. Securitized 1031 exchange programs are structured as securities and sold to retail investors, with the vast majority structured as Delaware statutory trust offerings.
The number of active sponsors and offerings were comparable, year-over-year, with 40 active sponsors and 170 offerings in 2020 and 38 sponsors and 171 offerings in 2019. At the industry’s peak in 2006, there were 71 sponsors that raised approximately $3.7 billion through 341 offerings.
The top five sponsors by market share were Inland Private Capital (19 percent), ExchangeRight (12 percent), Capital Square (11 percent), Black Creek Group (8 percent), and Passco Companies (7 percent). Other notable mentions include Cantor Fitzgerald Investors and NexPoint Real Estate Advisors, each with 5 percent of market share, and BlueRock Real Estate, RK Properties, and Madison Capital Group, each with 3 percent.
Multifamily continued its reign as the most popular asset class with more than $1.6 billion and 51.1 percent of the total equity raised, followed by retail with $499.3 million and 15.6 percent, self-storage with $231.6 million and 7.26 percent, industrial with $207.3 million, and office with $159.1 million and 4.99 percent.
In 2020, 1031 exchange properties were heavily concentrated in Texas (36), Illinois (25), Georgia (25), and Florida (21).
Out of the 170 total offerings, the vast majority were structured as Delaware statutory trusts (161), followed by tenant-in-common (7), direct title (1) and limited liability companies (1). There were 123 offerings registered as 506(b) and 47 offerings registered as 506(c), the latter is growing in popularity and permits general solicitation to investors.
In 2020, the average first-year return was nearly 5.17 percent, and offerings averaged 200 days on market. The previous year, the average first-year return was nearly 5.5 percent with 185 days on the market.
On a webinar co-hosted with the Institute for Portfolio Alternatives, Taylor Garrett, managing director at Mountain Dell, said that he expects “bigger names…to continue to come in with unique products that will continue to grow the space, and show some additional clout and why this has been a good investment vehicle for a lot of investors, as we’ve transitioned from TICs to DSTs.”