The 1031 Dog That Has Yet To Bark (Again)

weiner dogsYou may have heard there is plenty of money in the market for real estate acquisitions. Of course, like any other urban legend, the facts are a difficult thing to come by as the lens becomes more focused.

Like politics, real estate is local.  So, local to New York City, there is a significant amount of money and property assets moving around. The same is true for most job center cities.  Yet as we begin to delineate at the transaction level. The size and scope of deals that are trading reflect a reality that sales, at the top and bottom of the food chain,  are moving much faster than those in the middle.

According to an article in NREI, there were 4.1 Billion dollars in 1031 exchanges in 2007 (http://nreionline.com/commentary/1031-exchanges-gain-traction-lending-activity-increases).  In 2010 that number was 1 Billion dollars. At the same time, it has inched up since it is nowhere near pre-recession peak volume.

The United States has an improving economy, a stable housing market (as compared to 2009-2011), yet small commercial multifamily transaction volume (those deals under $5M dollars)  is abruptly lower than many expect given that stabilizing operations are the rule of the day.  Why? It’s almost a circular reference; 1031 tax exchanges drive a HUGE percentage of these transactions. Lower 1031 activity equals lower overall business activity.

In the best of times, 1031 exchanges in specific markets could account for as much as 30% of property trades. With tighter bank financing and lower capital gains rates, 1031 money is less of a factor in overall property sales volume.  But don’t count it out. Every billion dollars that 1031’s account for is a billion dollars in transactions that may not have occurred otherwise.

Watch the 1031 volume in your local marketplace as a marker of sales activity.  Regardless of which side of the trade you are on, its good to know if this tool in your toolbox is readily in use.

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

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