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COVID-19 is Creating a Rush on 1031 Exchange Equity

May 11, 2020

COVID-19 is Creating a Rush on 1031 Exchange Equity

May 8, 2020 | Bill Robbins | WealthForge

The coronavirus pandemic has had rippling effects on the economy over the past several months, including sending stocks into a bear market and causing the Federal Reserve to drop interest rates to 0%. One part of the economy that tends to be slower to react is commercial real estate. However, 1031 Exchange sponsors are starting to feel the effects and so are their investors. The economic turmoil is expected to create a rush of market participants trying to place investments into a closing window of available product.

PRODUCT SHORTAGES

1031 exchange sponsors operate by acquiring real estate properties in a variety of market segments, including multi-family, student housing, office buildings, medical facilities, self-storage, and more, with a combination of equity and debt financing. Some of these sectors have been hit harder than others. Retail and hospitality have fallen off as people are staying home. Student housing has faced uncertainty as colleges and universities have closed for the spring semester and are now planning for the Fall. Other segments such as medical facilities have continued to perform well throughout the pandemic.

As a result of the uncertainty in the market, the qualifying process for securing loans has recently become more strenuous as banks are tightening their purse strings. CMBS financing has come screeching to a halt, with new availability not expected to open up until the third quarter of 2020. Without debt financing, sponsors’ ability to acquire new properties is severely diminished. As a result, new acquisitions are slowing, and the ones that are coming about are smaller and composed of mostly equity financing.

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Gregory De Jong, CFP, Co-Founder of Paragon Advisors, LLC.
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Blue Vault is just what advisors need to size up the different offerings in the nontraded REIT market. Just as importantly, it’s what the industry needs to encourage best practices among REITs.