Securitized 1031 exchange offerings are expected to raise a record-breaking $5.2 billion by year-end, after finishing the first quarter of 2021 with $1.17 billion, an increase of 15 percent compared to the same period of 2020, according to a recent report released by Mountain Dell Consulting, a market research and analytics firm focused on the securitized 1031 exchange marketplace.
Mountain Dell indicated that in addition to the $1.17 billion raised in the first quarter, there was an additional $114 million that was not reported, bringing the actual total closer to $1.3 billion.
Last year’s fundraising reached just shy of $3.2 billion. While the year started off strong with more than $1 billion raised in the first quarter, it took a pandemic-related decline to $422 million in the second, only to rebound in the third and fourth quarters with $739 million and $990 million raised, respectively.
In the first quarter of 2021, 1031 exchange offerings averaged close to $100 million raised per week, up significantly from the prior quarter’s weekly raise of $76.2 million.
As such, Mountain Dell increased its 2021 fundraising forecast, estimating that 1031 exchanges could reach an eye-watering $5.2 billion by year-end. Earlier this year, the firm projected that the market could reach a record $4 billion in 2021, exceeding the two highest fundraising years on record: 2006 and 2019, with nearly $3.7 billion and $3.5 billion raised, respectively.
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.
During the first quarter of 2021, there were 33 active sponsors and 97 offerings, of which 38 closed. Mountain Dell reported that full-cycle events for Delaware statutory trusts are significant and anticipates close to $1.5 billion this year.
The top five sponsors by market share were Inland Private Capital (18 percent), Capital Square (14 percent), ExchangeRight (10 percent), Black Creek Group (8 percent), and Passco Companies (6 percent). Other notable mentions include Cantor Fitzgerald Investors with 5 percent of market share, followed by Carter Exchange, Bluerock Real Estate, Time Equities, Kingsbarn Realty Trust, and Madison Capital Group, each with 4 percent.
Multifamily continued to outperform all other asset classes with more than $600.6 million and 51.2 percent of the total equity raised, followed by industrial with $178.5 million and 15.2 percent, retail with $166.5 million and 14.2 percent, multi-manufactured housing with close to $60.2 million and 5.1 percent, and self-storage with $54.6 million and 4.7 percent.
1031 exchange properties were concentrated in Texas (17), Illinois (11), Georgia (11), and Florida (14), continuing the same trend from 2020.
Out of the 97 total offerings, the majority were structured as Delaware statutory trusts (88), followed by tenant-in-common (7), direct title (1) and limited liability companies (1). There were 71 offerings registered as 506(b) and 26 offerings registered as 506(c), which permits general solicitation to investors. As of March 31, 2021, the average first-year return was 5.24 percent.
Mountain Dell anticipates that new sponsors will enter the market, as the supply of 1031 exchanges cannot meet the increasing demand in the current environment.