By Dees Stribling
The Great Recession floored the net-lease market and the overlapping but distinct market for 1031 exchanges, just as it did for the rest of commercial real estate. But as 2010 begins, there are glimmers of hope for the two markets in New Jersey and nationwide—just as there are throughout the rest of real estate.
“1031 exchange volume has been off 70 to 90 percent in the last year, depending on geography, and we’re not going to see the glory days of a few years ago repeat themselves anytime soon,” says William Exeter, president and CEO of Exeter 1031 Exchange Services LLC, a 1031 exchange specialist based in southern California but with a number of offices elsewhere, including Springfield.
“Still, we’re seeing some signs of life,” Exeter continues. “We’re coming full cycle now, with a slow crawl out of the hole in the form of slight increases in monthly activity. We’re getting more e-mails, phone calls, and other inquiries than before, and that generally translates into business in the next six months.”
The number of inquiries from the greater New York market, including New Jersey, is part of that increase, Exeter says. It’s a market that never suffered quite as much as places like California, Nevada, or Florida, and indeed there’s been a scattering of major 1031 deals in the state in 2009, such as the sale this summer of 801 Cooper Landing Road in Cherry Hill, a 176-unit mid-rise apartment complex that fetched $13.5 million. The deal, arranged by Gebroe-Hammer Associates, saw the Orbach Group sell the property to an unnamed buyer; Orbach was pursuing an investment opportunity in New York City.
Despite deals like that, 2009 made everyone in the 1031 business suffer, some to the point of throwing in the towel. Though no one tracks the number of qualified intermediaries (the industry term for those who facilitate 1031s), anecdotal evidence suggests that a good many of them have simply exited the business temporarily or permanently.
The problems vexing 1031 volume have been similar to the rest of the real estate investment—both buyers and sellers have been reluctant to do deals for a variety of sound business reasons. But there’s a twist to 1031s that has probably slowed things down even further than for standard real estate investment. The whole purpose of the structure is to protect appreciation from taxes as the result of a sale. In the wake of a general decline in property values, however, there isn’t nearly as much appreciation to protect as there was in, say, 2006.
Interestingly, Exeter adds that in some cases, he’s seeing sellers doing 1031 exchanges even though they have no equity left in the original property. “There are owners being forced out of properties or in a foreclosure process who have no equity, but they do have a taxable gain,” he says. “We started to see more of those situations in the latter half of 2009, and it will continue as people begin to realize you can do a 1031 with equity.”
The net-lease realm has similarly taken a hit since 2007, but with some prospect of better times in 2010, if not precisely recovery. According to investment specialist Marcus & Millichap, investment activity among single-tenant retail assets nationwide dropped 45 percent in the first nine months of 2009. “In recent years, investors seeking to allocate exchange proceeds from apartments and other more management-intensive assets flocked to quick-service restaurants and drugstores,” notes the company’s forecast for the 2010 U.S. net-lease market. “Reduced numbers of exchange sales and sale-leaseback transactions,” reads the report. “However, should drag on investment activity through the first half of 2010.”
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