14A — January 12 - 25, 2018 — 2018 Forecast — M id A tlantic
Real Estate Journal
2018 F orecast By Stuart Berger, Sax LLP
The CRE industry is resilient andwill undoubtedly adapt successfully to whatever changes lie ahead A s we enter 2018, all industries (and the real estate sector in par- estate in the first two quarters of 2018.
Certainly, the Tax Cuts and Jobs Act that President Trump signed into law on December 22 will significantly impact real estate, and although it may be too soon to tell the full scope, it is clear that specific segments of the market will be impacted differently. One struggle is that the new Tax Act has left uncertainty in some areas. While most indi- vidual tax payers rushed to pay their real estate taxes at the end of 2017, there is now a larger void of information around the provisions for commercial real estate moving forward. Indi- vidual tax payers will be allowed to deduct approximately 20% of
their qualified business income. This amount is going to be the lesser of 20% or the greater of 50% of W-2 wages paid to em- ployees, and 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property. This may sound clear, but what is the definition of a quali- fied business? Who qualifies, and will they be able to avail themselves of this provision? Does a management compa- ny, developer or construction company meet the definition? There is also a huge uncertainty regarding how the 2.5% is cal- culated. As we await further guidance, I believe this could be a factor in slowing down real
ership in these states will de- cline as individuals will opt-out of owning a home to avoid high property taxes and invest their money elsewhere. This, in-turn, will increase multi-residential building development to account for the increase in demand for residential housing which we have already begun to see. Retail will continue to be a challenge with the rapid switch to online sales vs. the traditional brick and mortar retailers – many of whom are on the verge of going dark. We have seen an increase in the repositioning of office spaces to complexes that contain retailers, restaurants and residential buildings. This trend goes hand-in-hand with the growing mindset and impor- tance of a work-life balance with the convenience of individuals having everything they need in one location. As millennials continue to emerge in the industry and im- proved technology bridges the gap in communicating remotely, we will continue to see the tra- ditional structure of a 9 a.m. – 5 p.m. work day dismantled and the idea that employees must report to an office challenged. With an increase in start-ups and entrepreneurial initia- tives, the move to collaborative work spaces continues as these shared offices allow for lower renting costs, networking op- portunities and fewer respon- sibilities. However, I project that this trend for collaborative offices will soften in the near future and there will be a slow shift back to private offices even though the office space of the fu- ture will undoubtedly continue to evolve. In my home state of New Jersey, a new Governor will certainly bring about change. We expect and will watch for sig- nificant changes in the State’s low-income housing policy due to continued activity in the courts and on the local level. On the legislative side, we expect changes in the state’s PILOT program which allows munici- palities to abate property taxes for developers when taking on projects in distressed areas. This could significantly change the landscape in requiring pre- vailing wages and allocation of the tax stream. NJ Governor-elect Phil Mur- phy has also been a large pro- ponent for the legalization of marijuana and vowed to take this on once in office. The belief is that potential tax revenue continued on page 15A
On a positive note, tax-free exchanges (Section 1031) were preserved for real estate. This will allow for the continued trading of properties at very aggressive cap rates. SALT (State and Local Taxa- tion) has become a more com- mon term now that the new Tax Act limits property tax deductions. This limitation, in addition to home mortgage in- terest deductions, will impact the values of residential real estate in high SALT states such as California, Maryland, Massa- chusetts, New Jersey and New York. The demand for homeown-
ticular) are preparing for major chang- es due to new l a w s a n d regul at i ons in addition to new thought- processes on h ow we d o
business. This is an exciting time, and as a leader in Sax LLP’s Real Estate Practice, it is my duty and passion to have my pulse on the market, and there is much that we can forecast for the coming future.
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