The recently passed tax reform package represents the most sweeping tax reform the country has seen since the Tax Reform Act of 1986 and will shift the dynamics of the real estate market in 2018 and beyond. While changes to mortgage interest and local and state deductions may adversely impact many homeowners, the new provisions are generally seen as positives for real estate investors and developers. In fact, many of the provisions passed will help investors by putting more money back into their pockets
For New York City, the investment sales market peaked in 2014 and 2015, with 5,534 properties sold in 2014 and record high sales of $80.4 billion in 2015. Last year (2017) however, marked the third consecutive year of reduced transaction volume, while values in New York City also started to slide. And, while Westchester and the Lower Hudson Valley have continued to trade briskly in 2016 and 2017, the likelihood of rising interest rates in 2018 may add downward pressure to suburban asset pricing as well.
In New York, a state with notably high property taxes, the elimination of deductions for interest paid on home equity loans and a lower mortgage interest deduction cap (formerly $1 million, now $750,000) will likely impact the number of residential properties purchased each year. This presents an opportunity for multifamily investors, as fewer homebuyers may reverse the recent trend toward increased homeownership. A shift away from home ownership, and towards renting, would help to firm up multifamily occupancy and rent growth fundamentals in 2018 and beyond.
Evidence that Class-B and Class-C multifamily remains viable for value-add investors Northeast PCG recently brokered the sale of a 38-unit portfolio in Newburgh (Hudson Valley submarket) which closed for $2.75 million in November 2017.
The state of retail
With 101 million square feet of retail closings announced during 2017 alone, brick and mortar retail is responding to a fundamental shift in the way consumers shop. Further, 2018 is projected to set a new record for retail space closures. While some traditional shopping malls are clamoring to maintain relevance by welcoming entertainment venues, health clubs and other experiential components, many are shuttering their doors. This marks the first time in several years that all retail, from Class-A to Class-C, is facing downward market pressure. That said, the spread on capitalization rates between Class-A, Class-B and Class-C retail will deliver far higher yields in 2018 to value-add investors in secondary locations.
Evidence that Class-B and Class-C retail remains viable is Northeast PCG’s recent sale of a 25,000 square foot, multi-tenant plaza in Poughkeepsie (Hudson Valley submarket) closing in February 2018 at $3,450,000, a nearly 8-percent capitalization rate on net operating income.
A look at the office market
With the corporate tax rate cut from 35-percent to 21-percent resulting from tax reform, expected job growth should further fuel a revival of the suburban office market in 2018. A Q4 2017 report from Newmark Knight Frank notes all areas of Westchester saw a year-over-year decrease in available office space. A recent article in The Journal News touts the growth of Westchester’s healthcare industry and repurposing of vacant or outdated office parks as driving forces behind these numbers. For example, two formerly vacant office buildings on Corporate Park Drive in Harrison were demolished to make way for 421 apartment units. In Sleepy Hollow, the former site of General Motors will find new life as a waterfront community boasting more than 1,100 units.
Underutilized or abandoned office properties often present investors with an opportunity to purchase below market value and reposition assets for better uses that will yield optimal returns.
Evidence that value-add office investment remains viable is Northeast PCG’s recent sale of a 36,000 square foot, multi-tenant office park in Wappingers Falls, NY (Hudson Valley submarket) which is now under contract at $6,200,000, a nearly 8-percent capitalization rate on net operating income.
As the real estate market responds to changes from recently passed tax reform, and with a potential interest rate hike on the horizon, investors can benefit from our proven track record of matching clients with qualified buyers of multifamily and commercial properties in the submarkets we serve. Our collaborative and research-driven solutions are tailored to meet the individual needs of investors and property owners across the Northeast who are looking to buy, sell or exchange mid-market properties, including mixed-use, multifamily, retail and office assets.