How New Tax Laws Could Impact Real Estate Investors 

Major Uncertainty Surrounds Proposed Tax Changes

• Potential tax provisions could impact capital gains tax rates, 1031 Exchanges, tax carried interest, and more
• Few details exist and proposal has a long road through Congress before being signed into law

Changes to Tax Policy Could Have Broad Impacts

• Proposal would raise capital gains tax for those making over $1 million to same rate as ordinary income
• A $500,000 cap on 1031 Tax Deferred Exchanges would impair investors’ reinvestment into new properties
• This could weigh on investment and economic activity, in turn slowing the redevelopment of needed CRE

What Actions Should Investors Take?

• Consider selling now; the sales market is strong and future tax hikes could consume additional appreciation gains
• Exchanging properties while tax rules are known can help avoid risks from unexpected changes
• New policies could be voted on this year, changing the real estate landscape for years to come

RETAIL SALES RESEARCH BRIEF: MAY 2021

Consumers Remain Active;
Retail Sales Well Above Pre-Recession Levels

Retail spending levels off. As the stimulus dissipated, consumer spending dipped 0.8 percent in April as shoppers stepped back from record purchasing. Year over year, core retail sales jumped 37.6 percent, though the annual comparison comes against a backdrop of broad shutdowns in April 2020. Some of the slowdown can be attributed to a wide pause in reopening policy changes last month. Moving forward, however, several modifications are on the horizon that should propel consumer spending higher. Several states are terminating federal unemployment benefits sooner than the current Sept. 6 timeline, which should help retailers staff to today’s occupancy guidelines. Additionally, the CDC lifted mask restrictions for vaccinated individuals, which will relieve some uneasiness among those still taking extra precautions to avoid contracting the virus.

Retail real estate turning the corner. Although net absorption is expected to remain negative over the short term, the return of space to the market is largely aligned with terminating leases rather than newly shuttering stores. Retail establishments that have persevered through the health crisis have the potential to thrive due to pent-up demand. Competition is lower following the bankruptcy of some service-related firms, and additional traffic will boost sales in the coming months. Spending at bars and restaurants is only down 2.0 percent from February 2020, despite foot traffic being 15.6 percent lower. More visitors are expected as capacity ramps up.

Fundamentals hold up better than anticipated. Retail vacancy increased 70 basis points year over year to 5.7 percent in the first quarter despite the tremendous pressure placed on retailers during the pandemic. That figure is expected to rise, though the immense stimulus and support  provided to stores from the Fed and Treasury Department appears to have been more successful than projected. The health crisis may have “trimmed the fat” from bricks-and-mortar retailers rather than eliminating concepts that would have otherwise survived. However, local retailers without access to lines of credit have been disproportionately impacted despite federal intervention.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics, Federal Reserve; Placer.ai; Transportation Security Administration; U.S. Census, Bureau

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Are We Facing a Labor Shortage?

• Retail sales jumped 15% above pre-recession levels and rising consumption is starting to stir inflation
• As demand rises, companies are reporting labor shortages despite an elevated number of unemployed
• About 4.1 million more people are unemployed now than before the pandemic; far below the 23M in April 2020

Disconnect Between Job Openings and Unemployment

• Job openings reached an all-time high this March, at over 8.1M; previous peak was 7.6M in November 2018
• Enhanced $300/week federal unemployment benefits disincentivize some people to work; run until September
• Disproportionately affects Retail and Hotel workers

Is This a Concern for Commercial Real Estate Investors?

• Staff shortages likely transitory; should settle by the Fall
• Risk of overstimulation exists, but likely better than the alternative scenario of under-stimulation
• Signs point to a faster recovery, which benefits all types of commercial real estate, even those facing headwinds

* Job openings through March; Unemployed through April
Sources: Marcus & Millichap Research Services, BLS