Grubb & Ellis survey predicts slow 2012 recovery for commercial real estate

A recent report released by real estate giant Grubb & Ellis indicated that commercial real estate will slowly continue to recover in 2012.

The 2012 National Real Estate Forecast predicts that the year will experience slow but persistent recovery in all sectors of the commercial real estate market. The report predicts that growth in the various sectors will be uneven, and listed the sectors in the order of strongest growth to weakest: multi housing, hospitality, industrial, retail and office.

Robert Bach, senior vice president and chief economist for Grubb & Ellis, stated that the economy will be faced with various challenges ranging from the European debt crisis to the outcome of the political elections.

"Although a variety of economic and political factors, including continued high unemployment, an upcoming U.S. presidential election and the unresolved European sovereign debt crisis weigh on the minds of real estate owners, users and investors, we anticipate gradual improvement in leasing markets and a boost in investment sales volume," Bach said in the statement. "This is based on an assumption of GDP growth in the range of 2.0 to 2.5 percent in 2012, still below the economy's long-term potential of around 3 percent, and an average of 125,000 net new payroll jobs per month."

The survey noted that multi-family housing provided one of the strongest performances of any commercial real estate sector in 2011. A minor 38,000 units were added to the market, and both occupancy and rental rates rose. The report predicted that both tough credit requirements for potential homebuyers and a growing number of people between the ages of 18 and 34 will serve to bolster this sector.

The report also indicated that industrial real estate would improve during 2012. Vacancy in the sector is expected to drop to 8.7 percent by the end of 2012 from its current level of 9.5 percent. New construction is expected to double the supply of available industrial space to 40 million square feet.

Investors who wish to take advantage of opportunities created by changing values in the market for commercial real estate can realize tax benefits by utilizing 1031 exchanges when buying and selling properties. Deferral of taxation is the primary benefit that can be derived by setting up one of these transactions with a qualified intermediary such as Strategic Property Exchanges, LLC. As long as one building is sold and another is purchased in a way that qualifies as a like-kind exchange, the owner can defer taxation on the property sold.

Circumventing the requirement to pay income taxes on the property sold will allow the owner to retain all the equity contained in the property. Keeping this equity will require the individual to utilize less debt when purchasing the replacement property. Lowering the debt requirement will make it easier for the business to purchase the new building in the current lending environment.

The monetary benefits of retaining all equity in a relinquished property are easily illustrated by assessing their impact on debt payments. These payments are made out of operating income, which can be taxed at rates as high as 40 percent. Therefore, lowering debt payments reduces an investor's tax burden. Reducing the amount of debt needed to purchase a replacement property will also decrease interest costs. Both of these reductions could increase the after-tax return of an owner of commercial property.

A business that needs its commercial property to conduct business could engage in a reverse 1031 exchange, which would permit it to purchase the replacement building and then sell the original property later.

One final benefit of setting up 1031 exchanges with qualified intermediaries is that there is no limit on the number of times they can be used. An investor who owns commercial real estate can engage in these transactions every time he sees a chance to benefit.